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In: Economics

An oil company uses a technology which it purchased for $15 million. Operating costs are $2...

An oil company uses a technology which it purchased for $15 million. Operating costs are $2 million per year, and output is 1 000 barrels per day. Calculate the after-tax IRR given the following information: The corporate tax rate is 25%, the price of oil is $20 per barrel, the service life of the technology is 5 years and salvage value is $2 million. If the after-tax MARR is 15%, is this a good investment?

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Expert Solution

The answer has been page numbered, please follow accordingly.

Note: IRR refers to the rate of return to ensure the break event point of the project. In other words, it is the maximum acceptable cost of capital.

If the cost of capital is more than the IRR than the project is not acceptable. Therefore in the given case, since the cost of captial (15%) is more than the IRR (13.23%), the project should not be accepted.

Rahul Sunny answered 1 year ago
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