Wildcat Drilling Contractors Inc. is considering the acquisition of a new deep-drilling rig at a cost of $12 million. With this added drilling capability, the company's net operating profits would increase by $2 million in the first year and grow by 10% per year over the seven-year service life of the rig. The salvage value of the rig after seven years would be about $2 million. Should Wildcat Drilling acquire the new drilling rig if its cost of capital is 13% compounded annually?

Question

Quizplus · Accepted Answer

The Answer of Wildcat Drilling Contractors Inc. is considering the acquisition of a new deep-drilling rig at a cost of $12 million. With this added drilling capability, the company's net operating profits would increase by $2 million in the first year and grow by 10% per year over the seven-year service life of the rig. The salvage value of the rig after seven years would be about $2 million. Should Wildcat Drilling acquire the new drilling rig if its cost of capital is 13% compounded annually?