(Payback period and NPV calculations) Plato Energy is an ol and gas explocasion and development company located in Farmington, New Mexico. The company dnls shaliow wels in hopes of finding significant oil and gas doposits. The firm is considering two different driling opportunities that have very different production potentials. The frest is in the Bamett Shalo region of central Texas and the other is in the Gult Coast. The Bamett Shaie propect requires a much larger initial investment but provides cash flows (if successful) over a much longer penod of time than the Gul Coast opportunity in addition, the longer life of the Bamett Shale perject also results in additional expenditures in year 3 of the project to enhance production throughout the projects 10 -year expectiod life This expendidure irvolves pumping ether water or CO2 down into the wells in order to increase the fow of oll and gas from the structure. The expected cash flows for the two projects are as follows a. What is the payback period for each of the two pecjects? b. Based on the payback periods, which of the two projects appears to be the beat alternative? What are the limitations of the payback peniod ranking? That is, what does the poyback period not consider that is important in detormining the value creation potontal of theso two projects? c. If Plato's management uses a discount rate of 21,1 percent to evaluate the present values of its energy imestment projocts, what is the NPV of the two proposed investments? d. What is your estimute of the value that will be created for Plato by se acceptance of each of these two investments? Data table a. Given the cash flow intormation in the table, the payback period of the Barnott Shale project is years. (Round to two decimal places.) The payback period of the Gulf Coast project is years. (Round to two decimal places:) b. Basod on the payback periods calculated above, the project which looks best using the paybock criterion is (Select from the drop-down menu.) Which of the following are limitations of the payback period ranking, that is, what does the paytack period not consider that is important in determining the value creation potential of these two projocts? (Seloct the best choice below.) A. The payback method ignores cash flows that are generated by the project beyond the end of the payback period: 1. The payback method ignores the time value of money. c. There is no cleat-cut way to define the cutolf criterion for the payback period that is tied to the value creation polential of the investment. D. All of the above. c. If Plato's management uses a discount tate of 20.5% to evaluate the protent values of its eneryy invetment projects, then the NPV of the Bamett Shavo project is 5 (Round to the nearest dollar) If Plato's manegement uses a discount rate of 20.5% to evaluato the present values of its energy investment projects, then the NPV of the Gulf Coast project is $ (Round to the nearest (dollar) d. The vive that wit be created for Plato by the acceptance of the Barnett Shalo propect is \$ (Round to the nearest dollar.) The value that will be eteated for Plate by the noceptance of the Guf Coast project is 5 (Round to the nearest doliar)
