Chapter 10, Problem 1SE

Spreadsheet Exercise

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 appear 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 cap1tal 1s 13%.

To Do

Create a spreadsheet to answer the following questions.

1. a. Calculate the project’s net present value (NPV). Is the project acceptable under the NPV technique? Explain.
2. b. Calculate the project's internal rate of return (IRR). Is the project acceptable under the IRR technique? Explain.
3. c. In this case, did the two methods produce the same results? Generally, is there a preference between the NPV and IRR techniques? Explain.
4. 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?