TEST # 5 – CHAPTER 6 Chapter 6: Valuing the Environment Name _________________________________________ Test Score________ Part A: Multiple-choice

In the recovery-project valuation, LD&E uses 20% and 32% discount rate for Permian Basin 1 and Permian Basin 2, respectively. Both projects involve land acquisition, as well as surface preparation and subsurface drilling costs of $3 million each.

a). Calculate the expected value of annual cash flows for each project.

b). Calculate the NPV for each project.

c). Which project is preferred using the NPV criterion?

NPV = PV(CF) – PV(costs)