Calculate the discounted payback period for barnet shale

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Reference no: EM133113906

Plato Energy is an oil and gas exploration and development company located in Farmington, NM. 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. The first is in the Barnet Shale region of Texas and the other is in the Golf coast. The Barnet Shale project requires a much larger investment but provides cash flows (if successful) over a much longer period of time than the Golf coast opportunity. The expected cash flow for the two projects are found below:

 Year 

Barnett Shale

Gulf Coast

0

$(5,000,000)

$(1,500,000)

1

2,000,000

$800,000

2

2,000,000

$800,000

3

$(1,000,000)

$400,000

4

$2,000,000

$100,000

5

$1,500,000

 

6

$1,500,000

 

7

$1,500,000

 

8

$800,000

 

9

$500,000

 

10

$100,000

 

  1. What is the payback period for each of the two projects?
  2. Based on the payback periods calculated above, which of the two projects appear to be the best alternative? What are the limitations of the payback period ranking?
  3. If Plato's management uses a 20% discount rate to evaluate the present values of the energy investment projects, what is the NPV of two proposed investments?
  4. Calculate the discounted payback period for Barnet Shale
  5. Calculate the PI for both projects

Reference no: EM133113906

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