The prospective exploration for oil in the outer continental shelf by a small, independent drilling company has produced a rather curious pattern of cash flows. The $1,507,000 expense at EOY 10 will be incurred by the company in dismantling the drilling rig a. Over the 10-year period, plot PW versus the interest rate () in an attempt to discover whether multiple rates of return exist. b. Based on the projected net cash flows and results in Part (a), what would you recommend regarding the pursuit of this project? Customarily, the company expects to earn at least 25% per year on invested capital before taxes. Use the ERR method (e=25%). Click the icon to view the interest and annuity table for discrete compounding when the MARR is 25% per year. End of Year 0 0-10 10 Net Cash Flow -$533,000 +196,000 - 1,507,000
The prospective exploration for oil in the outer continental shelf by a small, independent drilling company has produced a rather curious pattern of cash flows. The $1,507,000 expense at EOY 10 will be incurred by the company in dismantling the drilling rig a. Over the 10-year period, plot PW versus the interest rate () in an attempt to discover whether multiple rates of return exist. b. Based on the projected net cash flows and results in Part (a), what would you recommend regarding the pursuit of this project? Customarily, the company expects to earn at least 25% per year on invested capital before taxes. Use the ERR method (e=25%). Click the icon to view the interest and annuity table for discrete compounding when the MARR is 25% per year. End of Year 0 0-10 10 Net Cash Flow -$533,000 +196,000 - 1,507,000
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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Transcribed Image Text:N
123 45
2
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Single Payment
Compound
Amount
Present
Factor Worth Factor
To Find F
Given P
FIP
1.2500
1.5625
1.9531
2.4414
3.0518
3.8147
4.7684
5.9605
7.4506
9.3132
11.6415
14.5519
18.1899
22.7374
28.4217
Discrete Compounding; /= 25%
35.5271
44.4089
55.5112
69.3889
86.7362
108.4202
135.5253
169.4066
211.7582
264.6978
To Find P
Given F
PIF
0.8000
0.6400
0.5120
0.4096
0.3277
0.2621
0.2097
0.1678
0.1342
0.1074
0.0859
0.0687
0.0550
0.0440
0.0352
0.0281
0.0225
0.0180
0.0144
0.0115
0.0092
0.0074
0.0059
0.0047
0.0038
Compound
Amount
Factor
To Find F
Given A
FIA
1.0000
2.2500
3.8125
5.7656
8.2070
11.2588
15.0735
19.8419
25.8023
33.2529
42.5661
54.2077
68.7596
86.9495
109.6868
138.1085
173.6357
218.0446
273.5558
342.9447
429.6809
538.1011
673.6264
843.0329
1054.7912
Uniform Series
Present
Worth Factor
To Find P
Given A
PIA
0.8000
1.4400
1.9520
2.3616
2.6893
2.9514
3.1611
3.3289
3.4631
3.5705
3.6564
3.7251
3.7801
3.8241
3.8593
3.8874
3.9099
3.9279
3.9424
3.9539
3.9631
3.9705
3.9764
3.9811
3.9849
Sinking
Fund
Factor
To Find A
Given F
AIF
1.0000
0.4444
0.2623
0.1734
0.1218
0.0888
0.0663
0.0504
0.0388
0.0301
0.0235
0.0184
0.0145
0.0115
0.0091
0.0072
0.0058
0.0046
0.0037
0.0029
0.0023
0.0019
0.0015
0.0012
0.0009
Capital
Recovery
Factor
To Find A
Given P
AIP
1.2500
0.6944
0.5123
0.4234
0.3718
0.3388
0.3163
0.3004
0.2888
0.2801
0.2735
0.2684
0.2645
0.2615
0.2591
0.2572
0.2558
0.2546
0.2537
0.2529
0.2523
0.2519
0.2515
0.2512
0.2509
Transcribed Image Text:The prospective exploration for oil in the outer continental shelf by a small, independent drilling company has produced a rather curious pattern of cash flows.
The $1,507,000 expense at EOY 10 will be incurred by the company in dismantling the drilling rig.
a. Over the 10-year period, plot PW versus the interest rate () in an attempt to discover whether multiple rates of return exist.
b. Based on the projected net cash flows and results in Part (a), what would you recommend regarding the pursuit of this project? Customarily, the company
expects to earn at least 25% per year on invested capital before taxes. Use the ERR method (e=25%).
Click the icon to view the interest and annuity table for discrete compounding when the MARR is 25% per year.
End of Year
0
0-10
10
Net Cash
Flow
-$533,000
+ 196,000
- 1,507,000
Expert Solution
Introduction
The following informations are given.
Over the period of 10 year, the company is incurring an initial expense of $533,000 in the beginning, revenue of $196,000 for 10 years starting from year 1 and expense of $1,507,000 at year 10.
The present worth can be found out using the equation in a single step.
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Solved in 2 steps
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