Question: Red Mesa Oil Company is considering two projects. The As Is Project involves drilling for oil using existing technology. Given the estimated reserves, this project is expected to produce 15.6 million dollar at the end of three (3) year. Due to the relatively low level of risk involved, management's required rate of return is 12.5%.
The Bedrock project involves using new technology to drill for oil from a field located beneath bedrock. Given the higher risk involved, this project must provide a rate of return of 14.6%. If the new technique works, the project is expected to produce 12.4 million dollar in only two (2) years. Calculate the present value of each project using yearly compounding, & report on the relative values and the difference between the two.