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Determine the number of months needed for payout

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Question - Royal Queen Petroleum has the following data for its Bayou Field:

Property cost (acquisition cost)....... $ 60,000

Drilling cost (one well)................... 280,000

Estimated selling cost per bbl..................80

Estimated lifting cost per bbl...................26

State severance tax..................................5%

Royalty interest...................................12.5%

The company is considering two drilling plans which are estimated to have the following production:

Well A: 600 bbl per month. Completion cost, $500,000.

Well B: 1,000 bbl per month. Completion cost, 800,000.

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?

Reference no: EM131763076

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