RD Resources is now considering the drilling of a new oil well. The well will cost $3,000,000 to drill and complete. The well is estimated to produce 25,000 barrels of oil per year with a useful life of 5 years. Operating costs of the new well will be $7 per barrel. A new supervisor will be hired at an annual salary of $180,000 to oversee the drilling and operation of the new well. The selling price of a barrel of oil is $60.

REQUIRED: (cca = 25%; tax rate = 30%; required rate of return: 10%)

1. Compute the annual after tax cash flow from the new oil well (Calculate CCA for each year when calculating your annual after tax cash flow) .

2. Using your answer from #1 above, calculate the payback (payout) period

3. Calculate the net present value of the oil well