Question
Kinergy Corporation has the following data for its Cactus Field: Property cost (acquisitioncost).............................$80,000 Drilling cost (onewell).............................................280,000 Estimated selling cost perbbl............................................90 Estimated lifting cost perbbl.............................................25 State
Kinergy Corporation has the following data for its Cactus Field:
Property cost (acquisitioncost).............................$80,000
Drilling cost (onewell).............................................280,000
Estimated selling cost perbbl............................................90
Estimated lifting cost perbbl.............................................25
State severancetax...........................................................5%
Royaltyinterest..........................................................12.5%
The company is considering two drilling plans which are estimated to have the following production:
Well A: 700 bbl per month. Completion cost, $600,000.
Well B: 1,100 bbl per month. Completion cost, 900,000.
Required:
a. Determine the number of months needed for payout on each plan.
b. If the company depends on the payback method for its investment decision, which plan will be more preferred?
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