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Both Eastman Chemical company, large natural gas user, and Van Oil, a major natural gas producer, are considering investing in natural gas wells near Houston.

Both are all-equity-financed companies. Eastman and Van Oil are looking at identical projects. They have examined their respective investments, which would involve the negative cash flow now and positive expected cash flows in future. These cash flows would be same for both companies. No debt would be use to finance projects.

Both companies evaluate that their project would have net present value of $1million at the 18 percent discount rate and a -$1.1 million NPV at a 22 percent discount rate.

Eastman has the beta of 1.25, where Van Oil has a beta of .75.

Expected risk premium on market is 8 percent, and risk-free bonds are yeilding 12 percent.

Must either company proceed? Should both? Describe why?

Project Management, Management Studies

  • Category:- Project Management
  • Reference No.:- M933527

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