Question
28. Calculating NPV and IRR Using Excel. Oil Production, Inc., would like to drill oil from land the company already owns. The equipment is expected
28. Calculating NPV and IRR Using Excel. Oil Production, Inc., would like to drill oil from land the company already owns. The equipment is expected to cost $4,000,000, has a useful life of 5 years, and will be sold at the end of 5 years for $400,000. Annual costs for maintenance and other cash expenses will total $550,000. Annual net cash receipts resulting from the sale of oil are predicted to be $1,900,000. Working capital of $270,000 is required at the beginning of the project and will be returned at the end of 5 years. The equipment will require refurbishing at the end of year 3 at a cost of $300,000. Although the company's cost of capital is 15 percent, management established a required rate of return of 20 percent due to the high risk associated with this project.
Required:
- Use Excel to calculate the net present value and internal rate of return in a format similar to the Computer Application spreadsheet shown in the chapter.
- Should the company accept the proposal? Explain.
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