Spreadsheet Exercise-Drillago Company
Spreadsheet Exercise-Drillago Company
Spreadsheet Exercise-Drillago Company
Sum $16698543
NPV $1,698,543
The project is acceptable since its NPV is greater than $0.
b.
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.
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
Thus, this project is acceptable since the required payback period of the firm is being
satisfied by the project.