Mecha Oil Company is considering investing in a new oil well

Mecha Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $135,900 and will increase annual expenses by $41,589 including depreciation. The oil well will cost $492,600 and will have a $206,000 salvage value at the end of its 8-year useful life.

Calculate the annual rate of return. (Round answer to 0 decimal places, e.g. 25%.)

Annual rate of return

%

Solution

Year Revenue OperationG Expenses Incremental Revenue R Depreciation D Cash Inflow R+D Discount factor 23% Discounted Cash Flow Discount factor 23.3% Discounted Cash Flow 0 -492600 1 -492600 1 -492600 1 135900 41589 94311 35825 130136 0.8130 105801.6 0.8110 105544.2 2 135900 41589 94311 35825 130136 0.6610 86017.58 0.6583 85668.99 3 135900 41589 94311 35825 130136 0.5374 69932.99 0.5339 69480.13 4 135900 41589 94311 35825 130136 0.4369 56856.09 0.4330 56350.47 5 135900 41589 94311 35825 130136 0.3552 46224.47 0.3512 45701.92 6 135900 41589 94311 35825 130136 0.2888 37580.87 0.2848 37065.63 7 135900 41589 94311 35825 130136 0.2348 30553.55 0.2310 30061.34 8 135900 41589 94311 35825 130136 0.1909 24840.28 0.1873 24380.65 8 206000 206000 0.1909 39321.16 0.1873 38593.57 Total 4528.62 Total 246.8893 Depreciation (492600-206000)/8 35825 For this annual rate of return=IRR and IRR is where NPV is zero It is 23.3% ARR=23% rouded off