\"An oil and gas company is considering whether to begin drilling a new oil fiel
ID: 1115109 • Letter: #
Question
"An oil and gas company is considering whether to begin drilling a new oil field. The company will need to pay $5.5 million as an initial investment in order to extract the oil. The company will operate the field for a total of 5 years, during which its annual profit will be $3,412,000. During the 6th year, the company will not operate or gain any revenue from the oil field, but it will need to pay $9,174,000 in environmental remediation costs to return the area to an acceptable state. What is the MINIMUM interest rate for which this project is an acceptable investment? Enter the interest rate as a percentage. The interest rate could be a negative number."
Explanation / Answer
The minimum required interest rate is the Internal Rate of Return (IRR), computed using Excel IRR Function as follows.
Year Cash Flow ($) 0 -55,00,000 1 34,12,000 2 34,12,000 3 34,12,000 4 34,12,000 5 34,12,000 6 -91,74,000 IRR = 43.57%Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.