What is project irr

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Depending on the adoption of shale gas extraction technology in Poland and Ukraine, world natural gas prices will be either high or low in each of the years 2013- 2016. If they are high, prices will be $0.2 per cubic meter in 2013 and grow at 5% each year. If they are low, prices will be $0.1 per cubic meter in 2013 and grow at 5% each year. The probability of prices being high is 40%.

Today (2012) you are considering purchasing a license from the Russian government to extract natural gas from reserves in Siberia. These reserves can yield 10 billion cubic meters per year for at least 10 years; however, the license will expire after 2016. The variable costs (extraction) are $0.08 per cubic meter.

In addition to the variable costs, you need to install a pipeline to transport natural gas from your place of extraction to the buyers. This pipeline will cost $3 billion, and the installation must begin today (2012) in order to finish it in time to extract gas in 2013. At the end of 2016 you estimate that you will be able to sell this pipeline to the Russian government for $2 billion. The Russian government allows you to use straight line depreciation on this pipeline. The corporate tax rate is 30% and your average cost of capital is 11%.

-Suppose you were able to convince a Russian Minister to sell you the license for $1 million. What is this project's IRR?

Reference no: EM132953114

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