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%.
Questions:
1. What are the total investment costs in year 0, which will be capitalized and fully depreciated over the 10 year drilling period?
2. What are the annual cash flows associated with this ambitious venture for years 1-10?
3. What is the projects approximate Payback?
4. What is the Internal rate of return of the project?
5. What is the Net present Value of the Project?