Question - Royal Queen Petroleum has the following data for its Bayou Field:
Property cost (acquisition cost)....... $ 60,000
Drilling cost (one well)................... 280,000
Estimated selling cost per bbl..................80
Estimated lifting cost per bbl...................26
State severance tax..................................5%
Royalty interest...................................12.5%
The company is considering two drilling plans which are estimated to have the following production:
Well A: 600 bbl per month. Completion cost, $500,000.
Well B: 1,000 bbl per month. Completion cost, 800,000.
Required:
a. Determine the number of months needed for payout on each plan.
b. If the company depends on the payback method for its investment decision, which plan will be more preferred?