Question 3:

The Drillago Company is involved in searching for locations in which to drill for oil.

The firms current project requires an initial investment of $15 million and has an estimated life of 10 years.

The expected future cash inflows for the project are as shown in the following table:

Year Cash inflows

1 $ 600,000

2 1,000,000

3 1,000,000

4 2,000,000

5 3,000,000

6 3,500,000

7 4,000,000

8 6,000,000

9 8,000,000

10 12,000,000

The firms current cost of capital is 13%.

TO DO Create a spreadsheet to answer the following:

a. Calculate the projects net present value (NPV). Is the project acceptable under the NPV technique? Explain. \

b. Calculate the projects internal rate of return (IRR). Is the project acceptable under the IRR technique? Explain.

c. In this case, did the two methods produce the same results? Generally, is there a preference between the NPV and IRR techniques? Explain.

d. 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?