Question
Offshore Company (OC) is evaluating six oil rig investments.The Owner plans to buy the rigs today and sell them five years from today. The following
Offshore Company (OC) is evaluating six oil rig investments.The Owner plans to buy the rigs today and sell them five years from today. The following table summarizes the initial cost and the expected sale price for each property, as well as the appropriate discount rate based on the risk of each venture.
| Investment | Cost Today | Disocount Rate | Expected sales price in 5 years | IRR |
| Mount Rig | $3,000,000 | 15% | $18,000,000 | 43.10% |
| Ocean Park Rig | $15,000,000 | 15% | $75,500,000 | 38.20% |
| Lakeview Rig | $9,000,000 | 15% | $50,000,000 | 40.90% |
| Seabreeze Rig | $6,000,000 | 8% | $35,500,000 | 42.70% |
| Greenhouse Rig | $3,000,000 | 8% | $10,000,000 | 27.20% |
| West Rig | $9,000,000 | 8% | $46,500,000 | 38.90% |
OC has a total capital budget of $18,000,000 to invest in rigs.
a) What is the NPV of each inevsment?
b) Would ranking projects according to their IRR maximize OC's total NPV and lead to the correct selection?
c) Given is budget of $18,000,000, which rig should OC choose?
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