Problem 1 (50 points) General Electric is considering expanding their oil and ga
ID: 2789208 • Letter: P
Question
Problem 1 (50 points) General Electric is considering expanding their oil and gas exploration project in Alaska. The cash flow for one phase of the project involving pretotech, an oil and gas servicing company, is shown. Given reinvestment rate of 14% per year for excess funds and 10 % per year for borrowing rate for extra funds, determine: given MARR-12% Year Net cash flow 0 -60,0000 1 +2,700,000 2 30,000 +4,850,067 4 11,000 5 +53,000 a) How many number of ROR values is expected and why? b) Calculate the external rate of return. c) Is the project economically viable?Explanation / Answer
IRR 4400% 4403% 1/(1+44)^n 1/(1+44.03)^n Year Net Cash Flow Dis. Rate Dis. Rate PV-4400% PV-4403% - (60,000) 1.00000 1.00000 (60,000) (60,000) 1 27,00,000 0.02222 0.02221 60,000 59,960 2 (30,000) 0.00049 0.00049 (15) (15) 3 48,50,067 0.00001 0.00001 53 53 4 (11,000) 0.00000 0.00000 (0) (0) 5 53,000 0.00000 0.00000 0 0 38 (2) IRR=4400+38/(38+2)*(4403-4400) IRR 4402.85% ERR MARR: 12.00% e: 14.00% Cashflow breakdown for ERR Period Net Cash Flow Negative Positive Final 0 (60,000) (60,000) - (89,597) 1 27,00,000 - 27,00,000 - 2 (30,000) (30,000) - - 3 48,50,067 - 48,50,067 - 4 (11,000) (11,000) - - 5 53,000 - 53,000 1,09,16,340 (89,597) 1,09,16,340 161% (NPV) (FV) (ERR) Yes Project is economically Viable As IRR=4402.85%
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