A task force of capital budgeting analysts at Seger Ltd. collected the following data concerning the drilling and production of known petroleum reserves at an offshore location:
|
|
|
|
Investment in rigging equipment and related personnel costs
required to pump the oil |
$ |
6,200,000 |
|
Net increase in inventory and receivables associated with the
drilling and production ofthe reserves. Assume this investment
will be recovered at the end of the project. |
|
1,152,000 |
|
| Net cash inflow from operations for the expected life of the reserves, by year: |
|
|
|
| 2010 |
|
1,920,000 |
|
| 2011 |
|
3,456,000 |
|
| 2012 |
|
1,632,000 |
|
Salvage value of machinery and equipment at the
end of the well's productive life |
|
960,000 |
|
| Cost of capital |
|
10 |
% |
|
| (a) |
Using calculate the net present value of the proposed investment in the drilling and production operation. Assume that the investment will be made at the beginning of 2010, and the net cash inflows from operations will be received in a lump sum at the end of each year. (Ignore income taxes.) (Round pv factor to 4 decimal places, intermediate calculations and the final answer to the nearest dollar amount. Omit the "$" sign in your response.)
|