You have been given the assignment to read Beer School: Bottling Success at The Brooklyn Brewery. Upon completion of reading this informative book dealing with this real life rags to riches entrepreneurial….
Should the lease-and-flood arrangement be accepted?
An oil company is offered a lease of a group of oil wells on which the primaryreserves are close to exhaustion. The major condition of the purchase is that the oilcompany must agree to undertake a water-flood project at the end of five years tomake possible secondary recovery. No immediate payment by the oil company is required. The relevant cash flows have been estimated as follows:
|0||1-4||5||6-20||Discounted-cash-flow rate of return||Net present worth at 10%|
Should the lease-and-flood arrangement be accepted? How should this proposal bepresented to the company board of directors who understand and make it a policy toevaluate by discounted-cash-flow rate of return?