An oil and gas company acquired the mineral rights to a project 2 years ago for a cost of $2 million dollars. Last year the company spent $0.4 million on geological and geophysical (G&G) expenditures. Today (time zero), the company wants you to analyze whether it is better economically to sell the rights to the property for $4.0 million cash now (at time zero), or whether it would be better to keep the property and develop using one of two drilling development scenarios for which projected before-tax cash flows are given on the following time diagrams. All dollar values are in millions of dollars.
-2.0 -0.4 -12.5 8.0 5.0 4.0 3.0 3.0
A)-2 -1 0 1 2 3 4 5

-2.0 -0.4 -9.0 7.0 4.0 2.5 2.5 0.0
B) -2 -1 0 1 2 3 4 5

Use ROR analysis to determine whether it is better to sell the rights to the property today (time zero), or begin development using either the "A" or "B" scenarios. Assume the investor is seeking a nominal before-tax minimum ROR of 10%. Verify your ROR findings with NPV and PVR analyses. Then, compare the three options if the minimum ROR is raised to 20% reflecting the hurdle rate the company is currently imposing on projects.