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

Spreadsheet Exercise

The Drillago Company is involved in searching for locations in which to drill for oil. The firm’s 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 firm’s current cost of capital is 13%.

To Do

Create a spreadsheet to answer the following questions.

Calculate the project’s net present value (NPV). Is the project acceptable under the NPV technique? Explain.
Calculate the project’s internal rate of return (IRR). Is the project acceptable under the IRR technique? Explain.
In this case, did the two methods produce the same results? Generally, is there a preference between the NPV and IRR techniques? Explain.
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?

Expert Solution

Solution:-

To calculate NPV of the Project-

NPV of the Project is accepted when it is greater than or equal to zero. In the Given Case, NPV is greater than zero. hence, Project is accepted.

To Calculate IRR of the Project-

IRR is the rate of return at which NPV of the Project is zero. Company;s Cost of Capital is greater than IRR hence, Not Accepted.

To Calculate Payback Period-

Payback Period

Year	Cash Flow	Cummulative Cash Flow
0	-15000000
1	600000	600000
2	1000000	1600000
3	1000000	2600000
4	2000000	4600000
5	3000000	7600000
6	3500000	11100000
7	4000000	15100000
8	6000000	21100000
9	8000000	29100000
10	12000000	41100000

Payback Period =

Payback Period = 6.975 years

Payback Period is the amount of time which project takes to recover its initial investment. Payback Period is lower the better. Hence, Project is accepted.

If you have any query related to question then feel free to ask me in a comment.Thanks.

jeff jeffy answered 2 years ago

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