A task force of capital budgeting analysts at Seger Ltd. collected the following

Question

A task force of capital budgeting analysts at Seger Ltd. collected the following data concerning the drilling and production of known petroleum reserves at an offshore location:

Using Table 6-4, calculate the net present value of the proposed investment in the drilling and production operation. Assume that the investment will be made at the beginning of 2010, and the net cash inflows from operations will be received in a lump sum at the end of each year. (Ignore income taxes.) (Round pv factor to 4 decimal places, intermediate calculations and the final answer to the nearest dollar amount. Omit the "$" sign in your response.)

Investment in rigging equipment and related personnel costs
required to pump the oil $ 6,200,000 Net increase in inventory and receivables associated with the
drilling and production ofthe reserves. Assume this investment
will be recovered at the end of the project. 1,152,000 Net cash inflow from operations for the expected life of the reserves, by year: 2010 1,920,000 2011 3,456,000 2012 1,632,000 Salvage value of machinery and equipment at the
end of the well's productive life 960,000 Cost of capital 10 %

Explanation / Answer

Investment in machinery and equipment $(6,200,000) Investment in working capital (1,152,000) Annual cash inflows, by year: 2010 = $1,920,000 * 0.9091 = 1,745,472 2011 = 3,456,000 * 0.8264 = 2,856,038 2012 = 1,632,000 * 0.7513= 1,226,122 Salvage value = $960,000 * 0.7513 = 721,248 Release of working capital = $1,152,000 * 0.7513= 865,498 Net present value= 1,745,472+ 2,856,038+ 1,226,122+ 721,248+ 865,498- 1,152,000- 6,200,000= $62378

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