Question

Asked Apr 14, 2019

Hello,

A task force of capital budgeting analysts at Morrison Ltd., collected the following data concerning the drilling and production of known petroleum reserves at an offshore location. Use the appropriate factor(s) from the table provided. Round the PV factors to 4 decimal places.

Investment in rigging equipment and related personnel costs required to pump the oil | $6,800,000 | |

Net increase in inventory and receivables associated with the drilling and production of the reserves. Assume this investment will be recovered at the end of the project. | $1,180,000 | |

Net cash inflow from operations for the expected life of the reserves by year: | ||

2016 | 1,980,000 | |

2017 | 3,580,000 | |

2018 | 1,680,000 | |

Salvage value of machinery and equipment at the end of the well's productive life |
1,170,000 | |

Cost of Capital | 6% |

**Question:** Calculate the net present value of the proposed investment in the drilling and production operation. Assume that the investment will be made at the beginning of 2016, and the net cash inflows from operations will be received in a lump sum at the end of each year (ignore income taxes).

**Net Present Value = ???**

thanks...

Step 1

The Net Present Value of the project has to be determined by deducting the present values of all inflows from the present values of all outflows

Step 2

The Present Value of inflows and (outflows) have been presented below

Amount $ | PV of $1 @6% | Present value $ | |

Investment in rigging equipment | (6,800,000) | 1 | (6,800,000) |

Increase in inventory and receivables | (1,180,000) | (1,180,000) | |

Total Outflow | (7,980,000) | ||

Cash flow from operations in | |||

2016 | 1,980,000 | 0.9433 | 1,867,734 |

2017 | 3,580,000 | 0.89 | 3,186,200 |

2018 | 1,680,000 | 0.8396 | 1,410,528 |

Salvage value of machinery in 2018 | 1,170,000 | 0.8396 | 982,332 |

Increase in inventories recovered in 2018 | $1,180,000 | 0.8396 | 990,728 |

Total inflows | 8,437,522 | ||

Net present value | 457,522 |

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