Accounting: What the Numbers Mean 11th Edition by Wayne McManus,Daniel Viele,David Marshall

Exercise 37

Calculate NPV-compare to IRR A task force of capital budgeting analysts at Morrison Ltd. collected the following data concerning the drilling and production of known petroleum reserves at an offshore location:

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 received in a lump sum at the end of each year. Ignore income taxes, and round answers to the nearest $1.
b. What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.
c. Differences between estimates made by the task force and actual results would have an effect on the actual rate of return on the project. Identify the significant estimates made by the task force. For each estimate, state the effect on the actual ROI if the estimate turns out to be less than the actual amount finally achieved.