MyLab Finance with Pearson eText -- Access Card -- for Principles of Managerial Finance
15th Edition
ISBN: 9780134479903
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Textbook Question
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
| 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.
- a. Calculate the project’s
net present value (NPV). Is the project acceptable under the NPV technique? Explain. - b. Calculate the project's
internal rate of return (IRR). Is the project acceptable under the IRR technique? Explain. - c. 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?
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The Bush Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project will cost $450 million today. Bush estimates that once drilled, the oil will generate positive cash flows of $215 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, it recognizes that if it waits 2 years, it will have more information about the local geology as well as the price of oil. Bush estimates that if it waits 2 years, the project will cost $600 million, and cash flows will continue for 4 years after the initial investment is made. Moreover, if it waits 2 years, there is a 95% chance that the cash flows will be $220 million a year for 4 years, and there is a 5% chance that the cash flows will be $120 million a year for 4 years. Assume that all cash flows are discounted at 11%.
1. If the company chooses to drill today, what is the project's expected net…
Urmilaben
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…
Chapter 10 Solutions
MyLab Finance with Pearson eText -- Access Card -- for Principles of Managerial Finance
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Ch. 10.5 - Prob. 10.13RQCh. 10 - Prob. 1ORCh. 10 - All techniques with NPV profile: Mutually...Ch. 10 - Elysian Fields Inc. uses a maximum payback period...Ch. 10 - Prob. E10.1WUECh. 10 - Prob. 10.2WUECh. 10 - Prob. E10.2WUECh. 10 - Axis Corp. is considering investment in the best...Ch. 10 - Prob. E10.3WUECh. 10 - Prob. 10.4WUECh. 10 - Prob. E10.4WUECh. 10 - Cooper Electronics uses NPV profiles to visually...Ch. 10 - Prob. E10.5WUECh. 10 - Payback period The Ball Shoe Company is...Ch. 10 - Payback comparisons Nova Products has a 5-year...Ch. 10 - Prob. 10.3PCh. 10 - Long-term investment decision, payback method Bill...Ch. 10 - Prob. 10.5PCh. 10 - Prob. 10.6PCh. 10 - Prob. 10.7PCh. 10 - Prob. 10.8PCh. 10 - Prob. 10.9PCh. 10 - Prob. 10.10PCh. 10 - Prob. 10.11PCh. 10 - Prob. 10.12PCh. 10 - NPV and EVA A project costs 2,500,000 up front and...Ch. 10 - Prob. 10.14PCh. 10 - Prob. 10.15PCh. 10 - Prob. 10.16PCh. 10 - Prob. 10.17PCh. 10 - Prob. 10.18PCh. 10 - Prob. 10.19PCh. 10 - Prob. 10.20PCh. 10 - Prob. 10.21PCh. 10 - Prob. 10.22PCh. 10 - Prob. 10.23PCh. 10 - Prob. 10.24PCh. 10 - All techniques with NPV profile: Mutually...Ch. 10 - Integrative: Multiple IRRs Froogle Enterprises is...Ch. 10 - Integrative: Conflicting Rankings The High-Flying...Ch. 10 - Problems with IRR White Rock Services Inc. has an...Ch. 10 - ETHICS PROBLEM Diane Dennison is a financial...Ch. 10 - Spreadsheet Exercise The Drillago Company is...
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