1)Mecha Oil Company is considering investing in a new oil well. It is expected t
ID: 2497333 • Letter: 1
Question
1)Mecha Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $131,500 and will increase annual expenses by $87,800 including depreciation. The oil well will cost $445,000 and will have a $10,500 salvage value at the end of its 10-year useful life. Calculate the annual rate of return.
2) Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $115,900. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $79,750, and annual cash outflows would increase by $41,780. Compute the cash payback period
3)Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $119,319. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $80,530, and annual cash outflows would increase by $41,690. The company’s required rate of return is 11%. Calculate the net present value on this project.
Explanation / Answer
2./ CALCULATION OF PAY BACK PERIOD
YEAR CASH INFLOW CASH OUT FLOW NET CASH FLOW CUMULATIVE CASH FLOW
1 $79750 $41780 $37970 $37970
2 79750 41780 37970 75940
3 79750 41780 37970 113910
4 79750 41780 37970 151880
PAY BACK PERIOD= 3 YEAR + CUMULATIVE CASH FLOW OF YEAR 3 / CASH FLOW OF YEAR 4
=3 + 113910 / 151880
=3 + 0.75
=3.75 YEAR OR 3YEAR 9 MONTHS
3./ CALCULATION OF NPV
INITIAL INVESTMENT IN YEAR 0= $119319
CASH INFLOW EACH YEAR FROM YAER 1 TO YEAR 4 =$80530
CASH OUT FLOW EACH YAER FROM YEAR 1 TO YEAR 4 =$41690
NET CASH FLOW EACH YEAR FROM YEAR 1 TO YEAR 4 =$38840
PRESENT VALUE ANNUITY FACTOR @11% FOR 4 YEAR =3.102
DISCOUNTED CASH FLOW FOR FOUR YEAR =$120481
TOTAL DISCOUNTED CASH INFLOW IN FOUR YEAR=$120481
LESS- INITIAL INVESTMENT =$119319
NPV =$1162
SORRY I DON'T KNOW ANSWER OF QUESTION 1
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