An oil company recently evaluated a proposed investment for improvements in a particular type of refining equipment. According to the analysis, such improvements would require an investment of $15 million and would result in an incremental after-tax cash flow of $2 million per year for nine years following the year of the investment.
If the discount rate is 10 percent, what is the net present value of this project?
If the discount rate is 15 percent, what is the net present value of this project?
What discount rate would you argue makes most sense in evaluating this project?