The Drillago Company is involved in searching for locations in which to drill for oil. The firm’s current project requires an initial investment of $15 million and has an estimated life of 10 years. The expected future cash inflows for the project are as shown in the following table. Year Cash Inflows 1 $ 600,000 2 1,000,000 3 1,000,000 4 2,000,000 5 3,000,000 6 3,500,000 7 4,000,000 8 6,000,000 9 8,000,000 10 12,000,000 The firm’s current cost of capital is 13%. Solution Estimated life (years) 10 Cost-of-capital (r) 13% Initial investment $ 15,000,000 Year Cash Flow 0 $ -15,000,000 1 600,000 2 1,000,000 3 1,000,000 4 2,000,000 5 3,000,000 6 3,500,000 7 4,000,000 8 6,000,000 9 8,000,000 10 12,000,000 By using cell references to the given datea and the fucntion NPV caluclate the net present value of the project. Would you accept or Reject? Depending on whether or not you would take on the project or not based on the NPV's rule.
The Drillago Company is involved in searching for locations in which to drill for oil. The firm’s current project requires an initial investment of $15 million and has an estimated life of 10 years. The expected future cash inflows for the project are as shown in the following table. Year Cash Inflows 1 $ 600,000 2 1,000,000 3 1,000,000 4 2,000,000 5 3,000,000 6 3,500,000 7 4,000,000 8 6,000,000 9 8,000,000 10 12,000,000 The firm’s current cost of capital is 13%. Solution Estimated life (years) 10 Cost-of-capital (r) 13% Initial investment $ 15,000,000 Year Cash Flow 0 $ -15,000,000 1 600,000 2 1,000,000 3 1,000,000 4 2,000,000 5 3,000,000 6 3,500,000 7 4,000,000 8 6,000,000 9 8,000,000 10 12,000,000 By using cell references to the given datea and the fucntion NPV caluclate the net present value of the project. Would you accept or Reject? Depending on whether or not you would take on the project or not based on the NPV's rule.
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
Related questions
Question
| The Drillago Company is involved in searching for locations in which to drill for oil. The firm’s current project requires an initial investment of $15 million and has an estimated life of 10 years. The expected future |
||
| Year | Cash Inflows | |
| 1 | $ 600,000 | |
| 2 | 1,000,000 | |
| 3 | 1,000,000 | |
| 4 | 2,000,000 | |
| 5 | 3,000,000 | |
| 6 | 3,500,000 | |
| 7 | 4,000,000 | |
| 8 | 6,000,000 | |
| 9 | 8,000,000 | |
| 10 | 12,000,000 | |
| The firm’s current cost of capital is 13%. |
| Solution | |||
| Estimated life (years) | 10 | ||
| Cost-of-capital (r) | 13% | ||
| Initial investment | $ 15,000,000 | ||
| Year | Cash Flow | ||
| 0 | $ -15,000,000 | ||
| 1 | 600,000 | ||
| 2 | 1,000,000 | ||
| 3 | 1,000,000 | ||
| 4 | 2,000,000 | ||
| 5 | 3,000,000 | ||
| 6 | 3,500,000 | ||
| 7 | 4,000,000 | ||
| 8 | 6,000,000 | ||
| 9 | 8,000,000 | ||
| 10 | 12,000,000 |
By using cell references to the given datea and the fucntion NPV caluclate the
Would you accept or Reject? Depending on whether or not you would take on the project or not based on the NPV's rule.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 3 images
Follow-up Questions
Read through expert solutions to related follow-up questions below.
Follow-up Question
The Drillago Company is involved in searching for locations in which to drill for oil.
The firm’s current project requires an initial investment of $15 million and has an estimated life of 10 years.
The expected future
Year Cash inflows
1 $ 600,000
2 1,000,000
3 1,000,000
4 2,000,000
5 3,000,000
6 3,500,000
7 4,000,000
8 6,000,000
9 8,000,000
10 12,000,000
The firm’s current cost of capital is 13%.
TO DO Create a spreadsheet to answer the following:
- Calculate the project’s
net present value (NPV). Is the project acceptable under the NPV technique? Explain. \ - Calculate the project’s
internal rate of return (IRR). Is the project acceptable under the IRR technique? Explain. - In this case, did the two methods produce the same results? Generally, is there a preference between the NPV and IRR techniques? Explain.
d. Calculate the payback period for the project. If the firm usually accepts projects that have payback periods between 1 and 7 years, is this project acceptable?
Solution
by Bartleby ExpertKnowledge 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.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
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