D Question 1 1 pts An oil well has been operating for five years. The total operating cost for this oil well in its sixth year of operation would be $1 million. Based on the current price of oil, the revenues for this oil well in its sixth year of operation would be $1.5 million. The well has another $1 million in drilling costs that were incurred in Year O, but have not yet been recovered. Should the well be abandoned? Why or why not? Choose the statement below that best answers this question, based on the material provided in the lesson. O Yes, because the opportunity cost of another oil project will be larger. No, because the oil well has not yet paid back the initial investment. O Yes, because the $500,000 operating profit is not high enough to fully recover the $1 million drilling cost No, because the well continues to be profitable on an operating basis. The unrecovered drilling cost is sunk. Question 2 1 pts An oil well has been operating for four years with the following after tax cash flows: Year 0: -$5 million (drilling cost) Year 1: $1.5 million Year 2: $2 million Year 3: $2 million Year 4: $1 million Projected cash flows for the end of Year 5 would be-$500,000. Should the well be abandoned? Why or why not? Choose the statement beloww that best answers this question, based on the material in the lesson. O No, because the well will have paid back the drilling cost at the end of the fifth year O Yes, because if the well is not abandoned then the drilling cost will not be fully recovered. O Yes, because the Year 5 cash flow will be negative O No, because the well has been profitable for the first four years, so it should keep operating. Question 3 1 pts Calculate the payback period for an investment project with the following After Tax Cash Flow, assuming a discount rate of 14% annually. Note: Please enter the payback period to the second significant decimal place. For example, if you calculate a payback period of two and a half years, you would enter 2.50 in the space below. Year O 2 3 45 ATCF -1,000 -1,500 800 1,000 1,200 1,200 D | Question 4 1 pts Suppose you have to decide whether to sell an old machine or keep it with a major overhaul: 1. A) Selling the machine at time zero for $750,000 with zero book value and paying tax of 40% of the sale price. 2. B) Keeping the machine, which requires a major overhaul cost of $1,000,000 at time zero. The overhaul cost is depreciable from time 0 to year 5 (over six years) based on MACRS 5-year life depreciation with the half year convention (table A-1at IRS). In this case the overhauled machine can produce and generate equal annual revenue for five years (year 1 to 5) and salvage value of the machine will be $250,000 with zero book value at the end of year 5. The operating cost of the machine will be $400,000 per year from year 1 to year 5. Calculate the minimum annual revenue that machine has to generate such that the NPV of keeping and overhauling the machine is equal to the NPV of selling the machine. Assume a 40% income tax rate and after-tax minimum ROR of 12%. Note: I strongly suggest that you go carefully through Example 9-4 before trying this problem. Make sure that you can reproduce the answer in Example 9-4. You'll follow the same procedure to work through this