Title: To Frack or Not to Frack: That is the Question
Author(s) : Rick Proctor, James Murtagh
Case Study-Abstract To Frack or Not to Frack: That is the Question This case study analyzes the capital budgeting decision as to whether and how to potentially purchase two parcels of land to frack for natural gas. It employs decision tree analysis, a real option, and Monte Carlo simulation using any standard version of Excel to generate the NPVs. The analysis involves eight input decision variables including the forecasted price of natural gas, the life and output of the wells, and the WACC. The spreadsheet developed by (or provided to) the student generates the net cash flows and NPVs for the various assumptions using Monte Carlo simulation. The complexity of the case can be easily adapted to the level of the student. The instructor could also incorporate a discussion of the pros and cons of the (to some) controversial technique of fracking.