The Drilling Corp. owns drilling rights on a tract of land on which crude oil has been discovered. The Drilling Corp. projects that the tract will allow drilling and recovery on crude for the next 4 years. They anticipate the following cost associated with the project including the cost of restoring the land to a park-like atmosphere. Below are projected data associated with this project:Annual cash receipts of $50,000Annual cash expenses of $300,000Equipment requirements of $500,000. Some of this equipment will be sold for $20,000 at the conclusion of the lease. The remainder of the equipment will have no salvage value at the end of the project and will be abandoned, adding to the rustic park-like atmosphere of the property. Inventory and supplies necessary to begin and maintain the project are $40,000The cost of restoring the land to a pristine park-like setting and converting the drilling equipment into monkey bars is projected to be $100,000. ( Assume this is not a capital expenditure)BBDC has a cost of capital of 15%.Required:Evaluate this project for The Drilling Corp.

To evaluate the project, Net Present Value method will be used. Net present value method is defined…

Answered: The Drilling Corp. owns drilling rights…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 4P

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The Drilling Corp. owns drilling rights on a tract of land on which crude oil has been discovered. The Drilling Corp. projects that the tract will allow drilling and recovery on crude for the next 4 years. They anticipate the following cost associated with the project including the cost of restoring the land to a park-like atmosphere. Below are projected data associated with this project:

Annual cash receipts of $50,000
Annual cash expenses of $300,000
Equipment requirements of $500,000. Some of this equipment will be sold for $20,000 at the conclusion of the lease. The remainder of the equipment will have no salvage value at the end of the project and will be abandoned, adding to the rustic park-like atmosphere of the property.
Inventory and supplies necessary to begin and maintain the project are $40,000
The cost of restoring the land to a pristine park-like setting and converting the drilling equipment into monkey bars is projected to be $100,000. ( Assume this is not a capital expenditure)
BBDC has a cost of capital of 15%.

Required:

Evaluate this project for The Drilling Corp.

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