Macam Offshore Drilling (MOD) is a drilling company that drills for oil and extracts and processes it. MOD is considering purchasing a piece of drilling equipment worth $2,500,000. The machine would generate a net of $125,000 yearly pre-tax cash flows. The machine would be depreciated over the course of 25 years, at which time it is predicted to have a disposal value of $1,000,000. Management plans to depreciate the full value of the asset (not deducting the anticipated disposal value in the calculation), and will take a full year of depreciation the first year. MOD's tax rate is 25%, and the discount rate is 11%.
What is the Excess Present Value Index of the proposed machinery (rounded to 4 decimal places)? What does this indicate about the proposed project?

Question

Macam Offshore Drilling (MOD) is a drilling company that drills for oil and extracts and processes it. MOD is considering purchasing a piece of drilling equipment worth $2,500,000. The machine would generate a net of $125,000 yearly pre-tax cash flows. The machine would be depreciated over the course of 25 years, at which time it is predicted to have a disposal value of $1,000,000. Management plans to depreciate the full value of the asset (not deducting the anticipated disposal value in the calculation), and will take a full year of depreciation the first year. MOD's tax rate is 25%, and the discount rate is 11%. 
What is the Excess Present Value Index of the proposed machinery (rounded to 4 decimal places)? What does this indicate about the proposed project?

Quizplus · Accepted Answer

The Answer of Macam Offshore Drilling (MOD) is a drilling company that drills for oil and extracts and processes it. MOD is considering purchasing a piece of drilling equipment worth $2,500,000. The machine would generate a net of $125,000 yearly pre-tax cash flows. The machine would be depreciated over the course of 25 years, at which time it is predicted to have a disposal value of $1,000,000. Management plans to depreciate the full value of the asset (not deducting the anticipated disposal value in the calculation), and will take a full year of depreciation the first year. MOD's tax rate is 25%, and the discount rate is 11%. 
What is the Excess Present Value Index of the proposed machinery (rounded to 4 decimal places)? What does this indicate about the proposed project?

Macam Offshore Drilling (MOD) Is a Drilling Company That Drills