Nothing Special   »   [go: up one dir, main page]
Scribd Logo
Upload

Welcome to Scribd!

  • 164 views

    Spreadsheet Exercise-Drillago Company

    Uploaded by

    Queenie Millor
    The document presents cash flow analyses of a potential project using net present value (NPV), internal rate of return (IRR), and payback period calculations. The NPV is positive, indicating the project is acceptable. The IRR of 14.7% exceeds the firm's cost of capital of 13%, also indicating acceptance. While both NPV and IRR methods yield the same conclusion, NPV is considered superior because it does not rely on problematic reinvestment assumptions and is more conservative. The payback period of 7 years also satisfies the firm's required payback period criterion.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Spreadsheet Exercise-Drillago Company

    Uploaded by

    Queenie Millor
    164 views4 pages
    The document presents cash flow analyses of a potential project using net present value (NPV), internal rate of return (IRR), and payback period calculations. The NPV is positive, indicating the project is acceptable. The IRR of 14.7% exceeds the firm's cost of capital of 13%, also indicating acceptance. While both NPV and IRR methods yield the same conclusion, NPV is considered superior because it does not rely on problematic reinvestment assumptions and is more conservative. The payback period of 7 years also satisfies the firm's required payback period criterion.

    Original Description:

    Original Title

    Spreadsheet Exercise-Drillago Company.docx

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document presents cash flow analyses of a potential project using net present value (NPV), internal rate of return (IRR), and payback period calculations. The NPV is positive, indicating the project is acceptable. The IRR of 14.7% exceeds the firm's cost of capital of 13%, also indicating acceptance. While both NPV and IRR methods yield the same conclusion, NPV is considered superior because it does not rely on problematic reinvestment assumptions and is more conservative. The payback period of 7 years also satisfies the firm's required payback period criterion.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    164 views4 pages

    Spreadsheet Exercise-Drillago Company

    Uploaded by

    Queenie Millor
    The document presents cash flow analyses of a potential project using net present value (NPV), internal rate of return (IRR), and payback period calculations. The NPV is positive, indicating the project is acceptable. The IRR of 14.7% exceeds the firm's cost of capital of 13%, also indicating acceptance. While both NPV and IRR methods yield the same conclusion, NPV is considered superior because it does not rely on problematic reinvestment assumptions and is more conservative. The payback period of 7 years also satisfies the firm's required payback period criterion.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    a.

    Year Cash Flow PVIF, PV


    13%

    1 $600000 1.130 $530973.5


    2 1000000 1.277 783146.7

    3 1000000 1.443 693050.2

    4 2000000 1.630 1226637

    5 3000000 1.842 1628280

    6 3500000 2.082 1681115

    7 4000000 2.353 1700243

    8 6000000 2.658 2256959

    9 8000000 3.004 2663079

    10 12000000 3.395 3535060

    Sum $16698543

    Initial Investment $15000000

    NPV $1,698,543
    The project is acceptable since its NPV is greater than $0.

    b.

    Year Cash Flow

    0 -15000000

    1 600000

    2 1000000

    3 1000000

    4 2000000

    5 3000000

    6 3500000
    7 4000000

    8 6000000

    9 8000000

    10 12000000

    IRR 14.76%
    The decision criteria for IRR states that it should be pursued and is acceptable since the IRR of
    14.7% is greater than the firm’s current cost of capital which is 13%.

    c. The two methods produced the same results which is to accept the project. Either of the
    two methods can be used to find out the results of the project but NRV approach is
    superior ​because it does a better job of ranking projects and because it does not suffer
    from some of the mathematical quirks that occasionally affect IRR calculations. ​It is
    because IRR inherently assumes that any cash flows can be reinvested at the internal
    rate of return. This assumption is problematic because there is no guarantee that
    equally profitable opportunities will be available as soon as cash flows occur. NPV, on
    the other hand, does not suffer from such a problematic assumption because it assumes
    that reinvestment occurs at the ​cost of capital​, which is conservative and realistic.
    d.  

    Year   Cash  Investment 


    Inflows  Balance  

    0    -$15000000 

    1  $600000  -14400000 

    2  1000000  -13400000 

    3  1000000  -12400000 

    4  2000000  -10400000 

    5  3000000  -7400000 

    6  3500000  -3900000 
    7  4000000  +100000 

    8  6000000   

    9  8000000   

    10  12000000   
     

    Payback period = 6 + ($​3,900,000​÷ $​4,000,000​) = 6.975 years or 7 years

    Thus, this project is acceptable since the required payback period of the firm is being
    satisfied by the project.

    You might also like