Excel

Problem: The Drillago Company is involved in searching for locations in which to drill for oil. The firms current project requires an initial investment of $16.5 million and has an estimated life of 9 years. The expected future cash inflows for the project are as shown in the following table. All cash flows are expected to occur at the end of the year. The cost of capital is 11%.

Year	1	2	3	4	5	6	7	8	9
Cash slow	500,000	750,000	1,000,000	3,000,000	3,500,000	4,500,000	6,000,000	8,000,000	11,000,000

Create a spreadsheet to answer the following questions. Depict time in the columns, as shown above. Year: 1 2 3 4 5 6 7 8 9 Cash Inflo w 500,00 0 750,00 0 1,000,00 0 3,000,00 0 3,500,00 0 4,500,00 0 6,000,00 0 8,000,00 0 11,000,00 0

1. Calculate the projects NPV. Is the project acceptable under the NPV technique?

2. Calculate the projects IRR. Is the project acceptable under the IRR technique?

3. Did the NPV and IRR produce the same accept/reject results? Is there a preference for NPV or IRR?

4. Calculate the projects MIRR. How does it compare to the project IRR? Explain why the difference occurs.

5. Calculate the payback period for the project. If the firm usually accepts projects that have payback periods between 1 and 7 years, is this project acceptable? Note you do not need to use an excel function for this answer. Instead, add an additional line to your spreadsheet and show the cumulative dollar return from the project for each year. From there, you can determine a rough idea of the payback period.

For example, the cumulative returns in the first few years are:

Year 1 = -$16.5m + $0.5 m = -$16.0m.

Year 2 = -$16.0m + $0.75m = -$15.25m