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.

Research Questions :

1) What causes conflicts in the ranking of projects via net present value and internal rate of return?

2) Does the assumption concerning the reinvestment of intermediate cash inflow tend to favor NPV or IRR? In practice, which technique is preferred and why?