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Thinking of investing in natural gas production projects

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Planet Destroyer Inc., a large natural gas user, and Fracker Inc., a natural gas producer, are both thinking of investing in natural gas production projects in Missouri.

The source of natural gas that Planet Destroyer Inc. is thinking of investing in is located in North Missouri, while Fracker Inc.'s possible source lies in Southern Missouri.

The projects despite geography, are identical.

I have estimate that both projects would have the following NPV schedules:

  1. a net present value of $12.0 million if discounted at a 3% discount rate, a net present value of $7.0 million if discounted at a 6% discount rate, a net present value of $3.0 million if discounted at a 7.5% discount rate, and a net present value of $0 million if discounted at a 9% discount rate,
  2. a net present value of -$2.0 million if discounted at a 10.5 percent discount rate.
  3. As a company, Planet Destroyer Inc. has a beta of 1.25 and Fracker Inc. has a beta of 0.75, which is close to the beta for natural gas producing projects. The expected risk premium on the market is 6% and the risk free rate is 3%.

Should either company proceed with the project or should both proceed with the project? Why?

Reference no: EM132384071

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