Mr Blight the owner of Blight Oil exploration firm is evaluating a new Oil well in Calgary Alberta. The oil exploration engineer has just finished his analysis of the new Oil well. He has estimated that the Oil well will be productive for eight years, after which the well become dry. The Oil well will cost $450 million for exploration. The expected cashflow each year from the Oil well are shown below and Blight Oil exploration firm has a 12% required return on all its Oil well. year cash flow 0 -$450,000,000 1 63,000,000 2 85,000,000 3 120,000,000 4 145,000,000 5 175,000,000 6 120,000,000 7 95,000,000 8 75,000,000 9 -70,000,000 a) Determine the payback period, internal rate of return and net present value. Based on your analysis should the company open the new Oil well? b) Lets assume NPV is conceptually the best procedure for capital budgeting, why do you think that multiple measures are used in practice?
Mr Blight the owner of Blight Oil exploration firm is evaluating a new Oil well in Calgary Alberta. The oil exploration engineer has just finished his analysis of the new Oil well. He has estimated that the Oil well will be productive for eight years, after which the well become dry. The Oil well will cost $450 million for exploration. The expected cashflow each year from the Oil well are shown below and Blight Oil exploration firm has a 12% required return on all its Oil well. year cash flow 0 -$450,000,000 1 63,000,000 2 85,000,000 3 120,000,000 4 145,000,000 5 175,000,000 6 120,000,000 7 95,000,000 8 75,000,000 9 -70,000,000 a) Determine the payback period, internal rate of return and net present value. Based on your analysis should the company open the new Oil well? b) Lets assume NPV is conceptually the best procedure for capital budgeting, why do you think that multiple measures are used in practice?
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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Question
Mr Blight the owner of Blight Oil exploration firm is evaluating a new Oil
well in Calgary Alberta. The oil exploration engineer has just finished his
analysis of the new Oil well. He has estimated that the Oil well will be
productive for eight years, after which the well become dry. The Oil well will
cost $450 million for exploration. The expected cashflow each year from the
Oil well are shown below and Blight Oil exploration firm has a 12% required
return on all its Oil well.
| year | cash flow |
| 0 | -$450,000,000 |
| 1 | 63,000,000 |
| 2 | 85,000,000 |
| 3 | 120,000,000 |
| 4 | 145,000,000 |
| 5 | 175,000,000 |
| 6 | 120,000,000 |
| 7 | 95,000,000 |
| 8 | 75,000,000 |
| 9 | -70,000,000 |
a) Determine the payback period,
value. Based on your analysis should the company open the new Oil
well?
b) Lets assume NPV is conceptually the best procedure for capital
budgeting, why do you think that multiple measures are used in
practice?
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