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Plato Energy is an oil-and-gas exploration and development company located in Farmington, New Mexico. The company drills shallow wells in hopes of finding significant oil
Plato Energy is an oil-and-gas exploration and development company located in Farmington, New Mexico. The company drills shallow wells in hopes of finding significant oil and gas deposits. The firm is considering two different drilling opportunities that have very different production potentials. One is in the Barnett Shale region of central Texas, and the other is on the Gulf Coast The Barnett Shale project requires a much larger initial investment but provides cash flows (if successful) over a much longer period of time than the Gulf Coast opportunity In addition, the longer life of the Barnett Shale project results in additional expenditures in Year 3 of the project to enhance production throughout the project's 10-year expected life. This expenditure involves pumping either water or CO2 down into the wells in order to increase the flow of oil and gas. The expected cash flows for the two projects are as follows: Given Data: 10 Cash Flows (Gulf Coast) Annual Cumulative 1 $1,500,000) $800,000 $800,000 $400,000 $100,000 11 Year 0 1 2 3 4 5 6 7 8 9 10 12 13 14 15 Cash Flowa (Barnett Shale) Annual Cumulative ($5,000,000) $2,000,000 $2,000,000 ($1,000,000) $2,000,000 $1,500,000 $1,500,000 $1,500,000 $800,000 $500,000 $100,000 16 17 16 13 a. What is the payback period fomach of the two projects? 21 Barnett Shale Culf Coast 23 24 Payback Period b. Based on the calculated payback periods, which of the two projects appears to be the better alternative? 25 26 BY appears to be the best alternative
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