Should the lease and flood arrangement be accepted

Reference no: EM132202099

Question - 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 agree to undertake a water flood project at the end of 5 years to undertake possible secondary recovery. No immediate payment by the oil company is required. The relevant cash flows have been estimated as follows:

Year				Discounted cash flow rate of return	Net present worth at 10%
0	1-4	5	6-20	Discounted cash flow rate of return	Net present worth at 10%
0	$50,000	-$650,000	$100,000	?	$242,000

Continuous, constant cash flows were used except for the expenditure that occurs in one sum at the end of year 5. Continuous discounting at 10 percent per year was used for all cash flows. Check the net present worth value. 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 proposals by using the discounted cash flow rate of return method?

Reference no: EM132202099

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