Should the lease-and-flood arrangement be accepted

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An oil company is offered a lease of a group of oil wells on which the primary reserves are close to exhaustion. The major condition of the purchase is that the oil company must agree to undertake a water-flood project at the end of five years to make possible secondary recovery. No immediate payment by the oil company is required. The relevant cash flows have been estimated as follows:

Should the lease-and-flood arrangement be accepted? How should this proposal be presented to the company board of directors who understand and make it a policy to evaluate by discounted-cash-flow rate of return?

Reference no: EM131061562

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