TABLE 2.6OIL INVESTMENT DETAILSYear1234512. (Oil depletion allowance )A wealthy investor spends $1 million to drill and developan oil well that has estimated reserves of 200,000 barrels. The well is to be operated over5 years, producing the estimated quantities shown in the second column of Table 2.6. It isestimated that the oil will be sold for $20 per barrel. The net income is also shown.BarrelsGrossproduced revenue30,00010,00080,00070,00050,000 1,000,000 500,000200,00050,0001,600,000400,000 1,000,000NetDepletion Taxableincome Option 1 Option 2 allowance income400,000400,0001,200,000 352,000600,000200,000After-taxTaxincome800,000 360,000 840,000A depletion allowance, for tax purposes, can be computed in either of two ways eachyear: 22% of gross revenue up to 50% of net income before such deduction (option 1), orthe investment cost of the product, equal in this case to the unit cost of the reserves, $5 perbarrel (option 2). The allowance is deducted from the net income to determine the taxableincome. The investor is in the 45% tax bracket.(a) Complete Table 2.6 and show that the total depletion allowance exceeds the originalinvestment.(b) Calculate the PV and the IRR for this investment. Assume an interest rate of 20%.

It is given that investor has invested $1000,000 to drill and develop an oil well with reserve…

Answered: (a) Complete Table 2.6 and show that…

(a) Complete Table 2.6 and show that the total depletion allowance exceeds the original investment. (b) Calculate the PV and the IRR for this investment. Assume an interest rate of 20%.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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) Assuming a 9% cost of capital, find the modified internal rate of return for the following cash flows: a. 19.78% b. 6.95% c. 13.64% d. 7.86% Year Cash Flow 0 1 2 3 -$175 $167 $240 -$120
Consider two assets with the following cash flow streams: Asset A generates $4 at t=1, $3 at t=2, and $10 at t=3. Asset B generates $2 at t=1, $X at t=2, and $10 at t=3. Suppose X=6 and the interest rate r is constant. For r=0.1, calculate the present value of the two assets. Determine the set of all interest rates {r} such that asset A is more valuable than asset Draw the present value of the assets as a function of the interest rate. Suppose r=0.2. Find the value X such that the present value of asset B is 12. Suppose the (one-period) interest rates are variable and given as follows: r01=0.1,r12=0.2, r23=0.3. Calculate the yield to maturity of asset A. (You can use Excel or ascientific calculator to find the solution numerically.)
3. If a capital investment is $28,752.7 and equal annual cash inflows are 69,943.5, state the internal rate of return factor rounded to two decimal places.
d. Determine the minimum annual net cash flow necessary to generate a positive net present value, assuming a desired rate of return of 12%. Round to the nearest dollar.Annual Net Cash Flow fill in the blank 1 of 1$
REQUIRED Study the information given below and answer the following questions: 1. Calculate the Payback Period (expressed in years, months and days). 2. Calculate the Accounting Rate of Return on average investment (expressed to two decimal places). 3. Identify TWO (2) reasons why Umdloti Limited should not use the accounting rate of return to evaluate capital investments. 4. Calculate the Net Present Value. 5. Calculate the Internal Rate of Return (expressed to two decimal places) if the net cash flows are R320 000 per year for five years. Your answer must include two net present value calculations (using consecutive rates/percentages) and interpolation.
Average Rate of Return, Cash Payback Period, Net Present Value Method for a Service Company Spanish Peaks Railroad Inc. is considering acquiring equipment at a cost of $176,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $44,000. The company's minimum desired rate of return for net present value analysis is 12%. Present Value of an Annuity of $1 at Compound Interest 15% Year 6% 10% 12% 20% 1 0.943 0.909 0.893 0.870 0.833 1.736 2 1.833 1.690 1.626 1.528 2.673 2.283 2.487 2.402 2.106 4 3.465 3.170 3.037 2.855 2.589 3.605 3.353 5 4.212 3.791 2.991 3.785 4.917 4.355 4.111 3.326 3.605 7 5.582 4.868 4.564 4.160 6.210 4.968 4.487 3.837 8 5.335 6.802 5.759 5.328 4.772 4.031 6.145 5.650 5.019 10 7.360 4.192 Compute the following:
Take me to the text The following table indicates the net cash flows of a capital asset: Year Net Cash Flow 0 $-12,900 1 $4,100 2 $8,100 Do not enter dollar signs or commas in the input boxes. Use the negative sign where appropriate. Round the factor to 4 decimal places and the NPV to the nearest whole number. Assume the required rate of return is 9%. Determine the net present value of this asset. Year Net Cash Flow Factor Net Present Value $-12,900 0 1 2 Total $4,100 $8,100 SA $ 69
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