An oil and gas exploration firm invested $1,600,000 in drilling for natural gas in a new gas field. The firm's geologist believes the field has the potential to produce gas for 25 years. The revenue resulting from the gas well the first year after drilling is $700,000; based on previous experiences with similar types of wells, it is expected the annual revenue will decrease at an annual rate of 2%. Likewise, the costs of operating the well the first year totals $160,000: costs are expected to increase at an annual rate of 3%. Based on a 25-year planning horizon and a MARR of 17%, what is the firm's external rate of return for the investment? Click here to access the TVM Factor Table calculator. %

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
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An oil and gas exploration firm invested $1,600,000 in drilling for natural gas in a new gas field. The firm's geologist believes the
field has the potential to produce gas for 25 years. The revenue resulting from the gas well the first year after drilling is $700,000;
based on previous experiences with similar types of wells, it is expected the annual revenue will decrease at an annual rate of 2%.
Likewise, the costs of operating the well the first year totals $160,000: costs are expected to increase at an annual rate of 3%.
Based on a 25-year planning horizon and a MARR of 17%, what is the firm's external rate of return for the investment?
Click here to access the TVM Factor Table calculator.
%
Transcribed Image Text:An oil and gas exploration firm invested $1,600,000 in drilling for natural gas in a new gas field. The firm's geologist believes the field has the potential to produce gas for 25 years. The revenue resulting from the gas well the first year after drilling is $700,000; based on previous experiences with similar types of wells, it is expected the annual revenue will decrease at an annual rate of 2%. Likewise, the costs of operating the well the first year totals $160,000: costs are expected to increase at an annual rate of 3%. Based on a 25-year planning horizon and a MARR of 17%, what is the firm's external rate of return for the investment? Click here to access the TVM Factor Table calculator. %
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