Question

In: Finance

An oil well will have a first cost of $470,000 and annual costs of $131,250. Income...

An oil well will have a first cost of $470,000 and annual costs of $131,250. Income is expected to be $190,000 per year. What is the payback period at 6% per year interest?

a. Between 8&9 years

b. Between 9&10 years

c. Between 10&11 years

d. Between 11&12 years

Solutions

Expert Solution

Ans a. Between 8&9 years

Year Annual Income (A) Annual Cost (B) Cash Flow/ Profit (A - B) Cumulative Cash Flow
0 0 470000 -470000 -470000
1 190000 131250 58750 -411250
2 190000 131250 58750 -352500
3 190000 131250 58750 -293750
4 190000 131250 58750 -235000
5 190000 131250 58750 -176250
6 190000 131250 58750 -117500
7 190000 131250 58750 -58750
8 190000 131250 58750 0
9 190000 131250 58750 58750
10 190000 131250 58750 117500
TOTAL 117500
Payback Period = 8 years

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