An oil well which could produce a net income of P15,083,207 per year for 25 years is being purchased by group of businessmen. If the return on investment is targeted to be 19.534% and a sinking fund at 17.351% interest is to be established to recover the investment. a. How much capital must be invested, assuming the oil well will become useless after 25 years? b. How much capital must be invested, if after 25 years you can receive P1,835,016 from the oil well? c. What percentage decrease in the rate of return on investment to increase the capital by 6%? Assume no salvage value.

An oil well which could produce a net income of P15,083,207 per year for 25 years is being purchased by group of businessmen. If the return on investment is targeted to be 19.534% and a sinking fund at 17.351% interest is to be established to recover the investment. a. How much capital must be invested, assuming the oil well will become useless after 25 years? b. How much capital must be invested, if after 25 years you can receive P1,835,016 from the oil well? c. What percentage decrease in the rate of return on investment to increase the capital by 6%? Assume no salvage value.

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

See similar textbooks

Related questions

Q: c. Using the MIRR and a cost of capital of 10.0%, would you take the project? a. How many IRRS does…

A: The modified internal rate of return is used in capital budgeting to evaluate the profitability of…

Q: Turner Video will invest $64,500 in a project. The firm's cost of capital is 6 percent. The…

A: The evaluation of investment returns is a crucial aspect of financial decision-making for…

Q: You are considering opening a new plant. The plant will cost $100.7 million upfront and will take…

A: Capital budgeting refers to the concept used for estimating the viability of the project through…

Q: Snowflake Resorts is considering investing in a project that has a net investment of $240,000. This…

A: “Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: you decided to invest in an equipment worth php12,000,000.00 capital WITH THE FOLLOWING DATA:…

A: Annual Worth is a financial evaluation technique used to determine the equal annual cost or…

Q: You have been offered a unique investment opportunity. If you invest, $10400 ?today, you will…

A: NPV is also known as Net Present Value. It is a capital budgeting technique which helps in decision…

Q: ou are considering opening a new plant. The plant will cost $104.1 million up front and will take…

A: Net present value and Internal rate of return are capital budgeting techniques used to evaluate…

Q: You have been offered a unique investment opportunity. If you invest $8,800 today, you will receive…

A: Net Present Value is the present value of cash inflows less the initial investment. If NPV is…

Q: You have been offered a unique investment opportunity. If you invest $11,600 today, you will…

A: The computation is shown in excel table below: The formula used above is shown below: Working…

Q: You are considering opening a new plant. The plant will cost $100.3 million up front and will take…

A: Capital budgeting is a decision-making technique that aids in determining the viability of the…

Q: You have been offered a unique investment opportunity. If you invest $9,500 today, you will receive…

A: Given: Initial investment = $9,500 Cash in flow in year 1 = $475 Cash in flow in year 2 = $1,425…

Q: Pablo Company is considering buying a machine that will yield income of $2,200 and net cash flow of…

A: Net Present value is present value of cash flow minus initial investment.

Q: Garnet Enterprises is considering an investment in new equipment that would allow the company to…

A: Simple rate of return is calculated by dividing the Net operating income by the initial investment.…

Q: You are evaluating a project that will cost $500,000, but is expected to produce cash flows of…

A: Cost of the project is $500,000 Annual cash flows are $125,000 Time period is 10 years Cost of…

Q: Lara Technologies is considering a cash outlay of $210,000 for the purchase of land, which it could…

A: Opportunity cost is the value forego by not choosing that option. Opportunity cost is cost incurred…

Q: Vacation Resorts Inc. (VRI) is interested in developing a new hotel in Spain. The company estimates…

A: Net Present Value today is simply the PV of cash inflows of $5.25 million for 20 years at 14%. But…

Q: Give typing answer with explanation and conclusion Deep Sea Drilling is evaluating drilling for…

A: Net present value (NPV) is a financial metric that is used to evaluate the profitability of an…

Q: Peaceful Cruises wants to build a new cruise ship that has an initial investment of $300 million. It…

A: Note : As per guideline we can solve only one question at a time so kindly post the other questions…

Q: Pablo Company is considering buying a machine that will yield income of $3,300 and net cash flow of…

A: Net present value is the net amount of total cash outflow and net cash inflows discounted at the…

Q: K You have been offered a unique investment opportunity. If you invest $11,300 today, you will…

A: NPV is also known as Net Present Value. It is a capital budgeting technique which helps in decision…

Q: Suppose Drake Pile Co. is considering a project to invest in a racehorse over the next 12 years.…

A: Here,Cost of Project (PV) is $130,000Revenue in Year 12 (FV) is $431,500Time Period (n) is 12…

Q: Company ABC invests in a long-term project that will start generating cash flows 10 years from now…

A: Annual cash flow (C) = $22,000,000Growth rate (g) = 0.02Interest rate (r) = 0.05Initial cost (I) =…

Question

An oil well which could produce a net income of P15,083,207 per year for 25 years is
being purchased by group of businessmen. If the return on investment is targeted to be
19.534% and a sinking fund at 17.351% interest is to be established to recover the
investment.
a. How much capital must be invested, assuming the oil well will become useless after
25 years?
b. How much capital must be invested, if after 25 years you can receive P1,835,016
from the oil well?
c. What percentage decrease in the rate of return on investment to increase the capital
by 6%? Assume no salvage value.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

Step 2

Step 3

Step 4

Step 5

Step by step

Solved in 5 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

1. A project requires an initial capital cost of (40 million ID). The investor expects the project will generate annual returns of (12 million ID), with expenditures about (4 million ID) annually. If you know that the economic life is (12) years, and the salvage value after the end of the economic life is (4 million ID). Considering that the less acceptable interest rate for the investor is (10%): A. Determining the economic feasibility for investing using the present worth method? B. What is the equivalent annual worth of this investment? C. Find the internal rate of return?
Vishano
You are considering opening a new plant. The plant will cost $96.2 million upfront and will take one year to build. After that, it is expected to produce profits of $30.2 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.2%. Should you make the investment? Calculate the IRR. Does the IRR rule agree with the NPV rule?
24. You are evaluating a project that will cost $534,000, but is expected to produce cash flows of $128,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 11% and your company's preferred payback period is three years or less. a. What is the payback period of this project? b. Should you take the project if you want to increase the value of the company? a. What is the payback period of this project? The payback period is ____years. b. If you want to increase the value of the company you (will/will not) take the project since the NPV is (negative/positive) **round to two decimal places**
1) Rainbow Corp. is considering an investment whereby it will invest $100 in a perpetuity that will pay the firm $30 annually forever, starting one year from now. If the firm has a payaback period of 3 years, will it do the project? a) Yes b) No 2) If Rainbow has a cost of capital of 10%, will it invest in the project when doing an NPV analysis? a) Yes b) No
You are considering opening a new plant. The plant will cost $97.5 million up front and will take one year to build. After that it is expected to produce profits of $29.1 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.8%. Should you make the investment? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. The NPV of the project will be $ million. (Round to one decimal place.)
You are considering opening a new plant. The plant will cost $102.6 million up front and will take one year to build. After that it is expected to produce profits of $30.9 million at the end of every year of production (starting two years from now). The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.8%. Should you make the investment? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. The NPV of the project will be $ million. (Round to one decimal place.) make the investment. (Select from the drop-down menu.) You The IRR is%. (Round to two decimal places.) The maximum deviation allowable in the cost of capital estimate is %. (Round to two decimal places.)

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS