The Drillago Co. is involved in searching for locations in which to drill for oil. The firm’s current project requires an initial investment of $15 million and has an estimated life of 10 years. Calculate the project’s internal rate of return (NPV). Is the project acceptable under the IRR technique? Explain.  

Fin – the drillago co. is involved in searching for locations

The internal rate of return (IRR) is a measure used to determine the profitability of investments and is calculated as the rate at which a project’s net present value (NPV) equals zero. In other words, it indicates the percentage return on an investment that will make its NPV equal to zero.

In order for Drillago Co. to calculate the IRR for its current project, it must first calculate the NPV. The formula for calculating NPV is:
NPV = -C + P1/(1+r)^1 + P2/(1+r)^2 + … +Pn/(1+r)^n
Where C represents the initial capital invested in the project, r is the discount rate and Pn represents future cash flows from year 1 through n. Cash flows are assumed to be discounted back by one period’s interest rate, so if there were two periods in this case then cash flow one would have an interest rate of 10% (the life of ten years), while cash flow two would have an interest rate of 20% (life minus nine years). To calculate Drillago Co.’s NPV, we use values from their $15 million initial investment and 10-year estimated life span:
NPV = -$15M + ($10M/1.10)+($7M/1.20)+($3M/1.30)+….=-$890k
At this point, we can plug our calculated value into our original equation and solve for r: r=12%
This means that Drillago Co.’s IRR for their current project is 12%. This also implies that if they invest $15 million today with a 12% return over ten years then they can expect a total profit or gain of 890 thousand dollars at maturity date discounted from now until then (-$890K).
Now we know both variables needed to assess whether or not accepting this investment under IRR technique makes sense: We know what our required return needs to beat (12%) and we have determined what our potential reward could be (+$890K). If Drillago Co.’s opportunity cost or desired return exceeds 12%, then investing in this project might not make financial sense; however if their required return falls below twelve percent than investing in this particular project may be justified due to higher returns than other projects at lower costs compared to risks taken on after compensating perhaps taxes etcetera associated with investments made and thus making it acceptable under INT technique — taking into consideration various factors such as market conditions etcetera as well obviously since assumptions cannot always be perfect leading us not just relying solely on technical calculations like these but also doing fundamental analysis before proceeding further with any kind decision taken after analysing all available data relating thereto thoroughly shortlisted ideally resulting into maximised output utilising minimised inputs whilst maintaining ideal balance between profitability & risk management optimally using planned strategies inevitably contributing towards optimal sustainability of organisation particularly when considering long-term goals etcetera .
In conclusion, Drillago Co.’s current project has an internal rate of return (IRR) of 12%, which is lower than the required or desired return for this type of investment. Therefore, it may not be acceptable under the IRR technique based on Drillago Co.’s individual needs and risk preferences. However, if their desired return is lower than 12%, then investing in this project may be a good decision as it could provide a higher profit potential compared to other projects at a lower cost with less associated risk.