Question: Written Problem 1: The Drillago Company is involved in searching for locations in which to drill for oil. The firm's current project requires an initial
Written Problem 1:
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 below.
(The firms current cost of capital is 13%. )
| Year | Cash Inflow |
|---|---|
| 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 |
a. What is the project's NPV? Show your work.
b. Is the project acceptable under the NPV technique? Explain
c. Calculate the project's IRR. Show your work.
d. Is the project acceptable under the IRR technique? Explain
e. Did the NPV and IRR techniques produce the same results?
f. Calculate the payback period for the project. Show your work.
g. If the firm usually accepts projects that have payback periods between 1 and 7 years, is this project acceptable? Why or why not?
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