E16-18 Calculate NPV-compare to IRR [LO 7, 9] A task force of capital budgeting
ID: 2348587 • Letter: E
Question
E16-18 Calculate NPV-compare to IRR [LO 7, 9]
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.)
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:
Explanation / Answer
a.
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 ………………………………………………………
$ 62,378
a.
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 ………………………………………………………
$ 62,378
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