Answer Happy

(Payback period and NPV calculations) Plato Energy is an oil and gas exploration and development company located in Farmington, Now Mexico. The company drills shallow wells in hopes of finding significant oil and gas deposits. The firm is considering two different drilling opportunities that have very different production potentials. The first is in the Bamett Shale region of central Texas and the other is in the Gulf Coast. The Barnett Shale project requires a much larger initial investment but provides cash flows (if successful) over a much longer period of time than the Gulf Coast opportunity. In addition, the longer life of the Barnett Shale project also results in additional expenditures in year 3 of the project to d enhance production throughout the projeci's 10-year expected life. This expenditure involves pumping either water or Co, down into the wells in order to increase the flow of oil and gas for the structure. The expected cash flows for the two projects are as follows: a. What is the payback period for each of the two projects? b. Based on the payback periods, which of the two projects appears to be the best altemative? What are the limitations of the paypack period ranking? That is what does the payback period not consider that is important in determining the value creation potential of these two projects? c. If Plato's management uses a discount rate of 21.4 percent to evaluate the present values of its energy investment projects, what is the NPV of the two proposed investments? d. Whal is your estimale of the value that will be crealed for Plalo by the acceplance of each of these two investments? X Data table a. (Round to two decimal places.) Year Gulf Coast S(1,300,000) 750.000 750,000 425,000 120.000 0 1 2 3 4 5 G 7 8 9 10 Barnett Shale $(4.800,000) 1,920,000 1920,000 (960,000) 1.920.000 1,520,000 1,520,000 1,520,000 850 000 600.000 110,000