PQR Ltd. started operations by acquiring an oil well on January 1, 20x1. It will produce oil for THREE years and the company will wind up at that time. PQR knows the amount of oil it will extract, but there is uncertainty about its oil revenues because of uncertainty in oil prices. Managers of PQR estimate the following uncertainty about future cash flows. Note that the distribution of cash flows in each year is unaffected by state realizations in previous years. Price Annual Sales Revenues Probability Premium price $15,000 0.30 Medium price $12,000 0.40 Low price $9,000 0.30 PQR operates under ideal conditions. The interest rate in the economy is 9%. The investment is to be financed with a three-year bank loan interest-only bank loan, to be repaid at the end of the third year. Assume sales revenues are received at year-end. The medium price prevails in the first year (20x1), and the premium price prevails in the second year (20x2). PQR pays dividends amounting to $2,000 each year.

REQUIRED: Round all calculations to the nearest $.

a. calculate the value of initial investment required by PQR Ltd.

b. prepare a comparative income statement using the accretion of discount format for PQE for the years ended December 31, 20x1 and 20x2

c. prepare in good form a balance sheet for PQR as at December 31, 20x2

d. explain whether the net income number in part (b) is relevant and reliable. you must relate your answers to the concept of ideal conditions