You own a producing oil well. If you do NOTHING, 1000 barrels of oil will ooze out of the ground in two years. Experts predict the oil can be sold for $100.80/barrel, two years from now. However, if the same 1000 barrels can be extracted in one year, by purchasing the oil pump today for 5000, experts predict it can be sold for $90/ barrel. Assume, after either scenario, nothing will be left and the pump will have no salvage value.
Should you buy the pump? Why or why not?
You own a producing oil well. If you do nothing, 1000 barrels of oil will "ooze" out of the ground in two years. Experts predict the oil can be sold for $100.80/barrel, two years from now. However, if the same 1000 barrels can be extracted in one year, by purchasing an oil pump today for $5000.00, experts predict it can be sold for $90.00/barrel. Assume, after either scenario, nothing will be left and the pump will have no salvage value. Should you buy the pump? Why or Why Not? Consider the following proposed plant. The initial cost is $340 mm; however, five (5) years after initiation, there will be a need for a major, one time only, overhaul which will cost $28mm. The life of the plant is considered to be infinite and the first net benefit of $25mm is to be collected one year after the project is undertaken. During the life of the plant, the yearly net cash benefits are expected to grow at the rate of two (2) percent per year. Please ignore taxes and depreciation. a) If the five (5) year overhaul is considered an extra expense and not part of the "normal" net cash benefit, will there be a positive or negative cash flow in year five (5) when the overhaul expense is included in the calculation? Please show your work b) Using what you know about perpetuities, please set-up the equation that could be used to calculate the IRR of this plant project. c) If you were asked to solve the equation you gave as your answer to part b), what concern would [Hint: Consider your answer to part a).] or should you have? Consider the following proposed plant. The initial cost is $340 mm; however, five (5) years after initiation, there will be a need for a major, one time only, overhaul which will cost $28mm. The life of the plant is considered to be infinite and the first net benefit of $25mm is to be collected one year after the project is undertaken. During the life of the plant, the yearly net cash benefits are expected to grow at the rate of two (2) percent per year Please ignore taxes and depreciation. If the five (5) year overhaul is considered an extra expense and not part of the "normal" net cash benefit, will there be a positive or negative cash flow in year five (5) when the overhaul expense is included in the calculation? Please show your work. a) b) Using what you know about perpetuities, please set-up the equation that could be used to calculate the IRR of this plant project. c) If you were asked to solve the equation you gave as your answer to part b), what concern would or should you have? [Hint: Consider your answer to part a).] Given an appropriate discount rate of nine (9) percent, is this project acceptable? Please show your work. d) 11 4 pts. -Due April 24, 2019
