Question

"An oil and gas company is considering whether to begin drilling a new oil field. The company will need to pay $4.6 million as an initial investment in order to extract the oil. The company will operate the field for a total of 5 years, during which its annual profit will be $3,344,000. During the 6th year, the company will not operate or gain any revenue from the oil field, but it will need to pay $8,990,000 in environmental remediation costs to return the area to an acceptable state. What is the MAXIMUM interest rate for which this project is an acceptable investment? Enter the interest rate as a percentage. "

Answer 1

For purpose of determining maximum interest ratefor which project remains acceptable, is the IRR at which NPV of project becomes 0 and beyond whichit necomes unacceptable
Rearranging the cash flows in table form
Year	Cash Flow
0	(4,600,000)
1	3,344,000
2	3,344,000
3	3,344,000
4	3,344,000
5	3,344,000
6	(8,990,000)
IRR =	58.04%
Excel Fn	=IRR(Values 0 to values 6)
So for maximum interest rate of 58.04%, project is acceptable and beyond that rate it is unacceptable