Oil Drilling company is considering the installation of new automated drilling equipment. The new equipment can be installed for $13,000,000 today and will have a life of 6 years until technological obsolescence due to rapid advances in drilling control technology. At the end of its 6-year life, its components will have a salvage value of $2,900,000, and it will cost $220,000 to have the equipment removed. The equipment will be depreciated under MACRS. The equipment will produce $7,975,000 additional sales capacity per year due to productivity gains. Additional technical labor cost will be $2,205,000 per year, and operating and maintenance costs will be $850,000 per year. The company is in a western state with no corporate income taxes and is in the 35% federal tax bracket. Estimate both the annual net income and annual cash flow. The company’s MARR for this project is 20.0%. Based on the net present value estimate, do you recommend installing the automated refining line? What is the equivalent uniform annual worth and IRR of the project?
Oil Drilling company is considering the installation of new automated drilling equipment.
The new equipment can be installed for $13,000,000 today and will have a life of 6 years
until technological obsolescence due to rapid advances in drilling control technology. At the
end of its 6-year life, its components will have a salvage value of $2,900,000, and it will cost
$220,000 to have the equipment removed. The equipment will be depreciated under
MACRS. The equipment will produce $7,975,000 additional sales capacity per year due to
productivity gains. Additional technical labor cost will be $2,205,000 per year, and operating
and maintenance costs will be $850,000 per year. The company is in a western state with no
corporate income taxes and is in the 35% federal tax bracket. Estimate both the annual net
income and annual cash flow. The company’s MARR for this project is 20.0%. Based on the
is the equivalent uniform annual worth and
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