(Answered) Question - royal queen petroleum has the following data for

Accounting

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?

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