A task force of capital budgeting analysts at Morrison Ltd. collected the follow

Question

A task force of capital budgeting analysts at Morrison Ltd. collected the following data conceming the drilling and production of known petroleum reserves at an offshore loation: Table 6-4. (Use appropriate factor(s) from the table provided. Round the PV factors to 4 decimals.) $7,300,000 Investment in rigging equipment and related personnel costs required to pump the ol Net increase in inventory and receivables associated with the drilling and production of the reserves. Assume this investment will be recovered at the end of the project 1,260,000 Net cash inflow from operations for the expected life of the reserves, by year 2016 2017 2018 2,060,000 3,660,000 1,760,000 1,060,000 Salvage value of machinery and equipment at the end of the welir's productive life Cost of capital Required: a. 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 2016, and the net cash inflows from operations will be recoived in a lump sum at the end of each year ( Ignore income taxes).

Explanation / Answer

Net Cash Flow statement from Investment in drilling and production operation :

Particulars Amount Cash Inflow/Outflow Discounting Factor Present Value Investment in rigging equipment and related personnel costs required to pump the oil (7,300,000) Outflow 1.0000 (7,300,000) 2016 Net increase in inventory and receivables associated with the drilling and production of reserves (1,260,000) Outflow 1.0000 (1,260,000) 2016 Net Cash Inflow 2,060,000 Inflow 0.9434 1,943,396 2017 Net Cash Inflow 3,660,000 Inflow 0.8900 3,257,387 2018 Net Cash Inflow 1,760,000 Inflow 0.8396 1,477,730 2018 Salvage Value of Machinery 1,060,000 Inflow 0.8396 889,996 2018 Recover of increase in inventory and receivables associated with the drilling and production of reserves 1,260,000 Inflow 0.8396 1,057,920 Net Cash Flow from Investment 66,430

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