Question: 2. You will need your spreadsheet program for this question. An oil prospecting firm must decide whether to extract oil from a tract that
2. You will need your spreadsheet program for this question. An oil prospecting firm must decide whether to extract oil from a tract that it owns. The oil company must pay $4.5 million up front to begin oil extraction. The oil will provide $3.5 million in revenues for four years beginning next year. Once oil production ceases, the well must be capped, which costs $10.25 million the year after production ends. The cost of capital is 12%. Turn in a copy of your spreadsheet answers. a. Should the firm undertake this project? Use a spreadsheet program. b. Find all IRRs for this project. c. Does IRR rule agree with the NPV rule when the cost of capital is 12%? How do you know? d. Use a spreadsheet program to graph an NPV profile for costs of capital from 3% to 50%. Turn in a copy of your graph.
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Answer I The firm should take this investment as the NPV of the project is positive Any project whic... View full answer
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