A Company is involved in searching for locations in which to drill for oil. The firms current project requires an initial investment of $25 million and has an estimated life of 12 years. the

firm usually accepts projects that have payback periods between 1 and 4 years. The expected future cash inflows for the project are as shown in the following table.

Year Inflow

1 500,000

2 1,000,000

3 1,000,000

4 2,500,000

5 2,500,000

6 3,000,000

7 3,500,000

8 4,000,000

9 6,000,000

10 8,000,000

11 10,500,000

12 12,000,000

The firms current cost of capital is 14%.

TO dO

Create a spreadsheet to answer the following questions.

a. Calculate the payback period for the project. Is the project acceptable under the pay back technique? Explain.

b. Calculate the projects net present value (NPV). Is the project acceptable under the NPV technique? Explain.

c. Calculate the projects internal rate of return (IRR). Is the project acceptable under the IRR technique? Explain.

d. In this case, did the two methods produce the same results? Generally, is there a preference between the NPV and IRR techniques? Explain. d.