An oil and gas exploration firm invested $1,900,000 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 $590,000; based on previous experiences with similar types of wells, it is expected the annual
An oil and gas exploration firm invested $1,900,000 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 $590,000; based on previous experiences with similar types of wells, it is expected the annual
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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An oil and gas exploration firm invested $1,900,000 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 $590,000;
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 $120,000; costs are expected to increase at an annual rate of 4%.
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.
17.23
%
Carry all interim calculations to 5 decimal places and then round your final answer to
2 decimal places. The tolerance is ±0.05.
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