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 3,000,000 6 3,500,000 7 4,000,000 8 6,000,000 9 8,000,000 10 12,000,000 By using cell references to the given datea and the fucntion NPV caluclate the net present value of the project. Would you accept or Reject? Depending on whether or not you would take on the project or not based on the NPV's rule.

Principles of Accounting Volume 2

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ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

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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	3,000,000
		6	3,500,000
		7	4,000,000
		8	6,000,000
		9	8,000,000
		10	12,000,000

By using cell references to the given datea and the fucntion NPV caluclate the net present value of the project.

Would you accept or Reject? Depending on whether or not you would take on the project or not based on the NPV's rule.

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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%.

TO DO Create a spreadsheet to answer the following:

Calculate the project’s net present value (NPV). Is the project acceptable under the NPV technique? Explain. \
Calculate the project’s internal rate of return (IRR). Is the project acceptable under the IRR technique? Explain.
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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