Problem:
The purchase of a jack up oil rig capable of standing in 325 ft of water costing $29,500,000. A significant relocation costs of the rig from costa rica estimated at $2,000,000. Equipment necessary to bring the rig to full operational status will be $2,500,000. Tugs, helicopter for JW's (the name of the company) use, mooring facilities, enviornmental equipment, and other contingencies unknown at the present time are estimated to be $1,000,000. All of these assets will be fully depreciated on the straight line basis over the project life. however, JW anticipates that he will be able to sell the rig for $7,500,000 in year 10. there will be a cash flow impact of this sale in year 10 and taxes associated with this sale. It is estimated that this rig will produce 1,000 barrels of oil/day and be in operation 325 days per year for the duration of the project life. There is a fixed sale price/barrel for the 10 years at $95 per barrel. There is an estimate of the projects variable costs at 35% of annual gross revenues. Fixed costs will be $7,500,000 per year. The corporate tax rate for the federal government and state is estimated to be 35%.
Required:
Question 1: What are the total investment costs in year 0, which will be capitalized and fully depreciated over the 10 year drilling period?
Question 2: What are the annual cash flows associated with this ambitious venture for years 1-10?
Question 3: What is the projects approximate Payback?
Question 4: What is the Internal rate of return of the project?
Question 5: What is the Net present Value of the Project?
Note: Please provide equation and explain comprehensively and give step by step solution.