An oil company is examining a proposal to purchase a new drill.The initial cost of the drill will be $3 500 000.The expected increase in net cash inflow as a result of the purchase is $1 000 000 for the first year and $1 900 000 for each of the next two years.The drill will have zero salvage value.At a discount rate of 15% the net present value of the drill is:

Question

Quizplus · Accepted Answer

The net present value of the drill is the sum of the present values of the expected net cash inflows, discounted at the given rate. The present value of the first year's cash inflow is $1,000,000 / (1 + 0.15) = $869,565.22. The present value of the second year's cash inflow is $1,900,000 / (1 + 0.15)^2 = $1,525,641.03. The present value of the third year's cash inflow is $1,900,000 / (1 + 0.15)^3 = $1,322,296.55. The net present value of the drill is $869,565.22 + $1,525,641.03 + $1,322,296.55 - $3,500,000 = $55,524.

An Oil Company Is Examining a Proposal to Purchase a New