Question
Consider a new downhole pump that costs $275,000 and has a 5-year useful life. At the end of the 5 years, it can be sold
Consider a new downhole pump that costs $275,000 and has a 5-year useful life. At the end of the 5 years, it can be sold for $80,000. The incremental revenue generated by the incremental production is generated by this pump is$70,000/year.
a)Calculate the total cashflow and draw a cashflow diagram.
b)Calculate the net present value of this project @9% discount rate.
c)Calculate the annual equivalent worth of this project @ 9% discount rate.
d)Should this purchase be made at an interest rate of 10%? Explain your decision.
e)Should this purchase be made at an interest rate of 0%? Explain your decision.
f)Should this purchase be made at an interest rate of 20%? Explain your decision.
g)What is the maximum discount rate at which you would approve this project? Explain your reasoning.
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