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Oil Search is considering a major investment in a new oil field in Western Australia.

Oil Search is considering a major investment in a new oil field in Western Australia. According to initial estimates, the investment outlay would be $2 500 000 and the project would generate incremental cash flows of $500 000 per year for nine years. The required rate of return by the investors is 7%.

(a)         Calculate the Net Present Value (NPV) (2 marks)

(b)         Calculate the Accounting Rate of Return (1 mark)

(c)          Calculate the Internal Rate of Return (IRR) (1 mark)

(d)         Should this project be accepted? (1 mark)

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(a)         Calculate the Net Present Value (NPV)  inflows-outflows (500000/1.07 1 )+(500000/1.07 2 )+(500000/1.07... View the full answer

a) NPV is $757616 b) ARR 10% c) IRR 14% d) Project Should... View the full answer

npv hjh.png

year cash flow [ in million $1 Present Value @736 W oi Cash flows Calculation of Present Value
0 ($2,500,000) 1 ($2,500,000)
1 $500,000 0.935 467289.720 Hi1+796)"1
2 3500.000 0.373...

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