Managers at Terlingua Drilling identify a potential new drilling project. They e

Question

Managers at Terlingua Drilling identify a potential new drilling project. They estimate the following expected net cash flows if the project is adopted. Year 0: ($1,250,000) Year 1: $100,000 Year 2: $400,000 Year 3: $400,000 Year 4: $200,000 Year 5: $200,000 Year 6: $300,000 Year 7: $100,000 Suppose that the appropriate discount rate for this project is 11.9%, compounded annually. Calculate the net present value for this proposed project. Do not round at intermediate steps in your calculation. Round your answer to the nearest dollar. If the NPV is negative, include a minus sign. Do not type the $ symbol.

Explanation / Answer

NPV = -115,834

Discount rate 11.9000% Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow      (1,250,000.00) 0                     (1,250,000.00)                 (1,250,000.00)         100,000.000 1                             89,365.50                 (1,160,634.50)         400,000.000 2                           319,447.74                     (841,186.76)         400,000.000 3                           285,476.08                     (555,710.67)         200,000.000 4                           127,558.57                     (428,152.10)         200,000.000 5                           113,993.36                     (314,158.74)         300,000.000 6                           152,806.12                     (161,352.62)         100,000.000 7                             45,518.65                     (115,833.97)

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