3.4 After years of working in the oil patch you have manage to scrape together $
ID: 2418410 • Letter: 3
Question
3.4 After years of working in the oil patch you have manage to scrape together $ 1 million you are willing to invest in a drilling venture using all your knowledge gained from years of experience you have made the following estimates of operating income and investment amount and timing. What is the maximum amount of money you expect to have to invest in this deal and when will that happen?
When do you anticipate payout will occur?
Plot the cumulative net cash
Year
Oper
income
M$
Invest
M$
0
20
1
0
80
2
50
500
3
140
100
4
126
5
113
3.5 what is the net present value at 15 % annum of the net cash flow for the project in problem 3.4 if it is assumed that all cash flow occur at the middle of the year?
3.6 what is the undiscounted return on investment (ROI) for the project in problem 3.4? what is the undiscounted profit: investment ratio where profit = net cash flow?
3.7 what is the discounted return on investment for the problem 3.4 using a discount rate of 4% per annum, assuming the cash flow as are received at the middle of the year? What is the discounted profit to investment ratio. Under the same assumption?
Year
Oper
income
M$
Invest
M$
0
20
1
0
80
2
50
500
3
140
100
Explanation / Answer
Calculations of the Net Present Values Year Cash Flow Discount Present Value 0 1.000 0.000 1 0 0.870 0.000 2 50 0.756 37.807 2 140 0.658 92.052 4 126 0.572 72.041 5 113 0.497 56.181 Present Value of Cash Inflow 258.081 Cash outflows Year Cash Flow Discount Present Value 0 20 1.000 20.000 1 80 0.870 69.565 2 500 0.756 378.072 2 100 0.658 65.752 4 0.572 0.000 5 0.497 0.000 Present Value of Cash Inflow 533.389 NPV = Present Value of cash inflows- present value of cash outflows 258.08-533.38 -275.3
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