Capital Budgeting Analysis of Drillago Company

CASE STUDY
DRILLAGO COMPANY –Capital Budgeting
STUDENT ID:
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Introduction
The objective of the given report is to analyse the new investment that the company seeks to
make which is expected to yield cash inflows over the next 10 years. Using the key capital
budgeting techniques, the aim is to provide a quantitative analysis of the given project with
sole focus on the financial feasibility.
Analysis
a) The NPV of the project has come out as $ 1,698, 543. This is highlighted from the relevant
screenshot of the attached spreadsheet.
With regards to NPV, the decision rule is that the project is considered to be acceptable if the
NPV of the project is positive. As the given project has a positive NPV, hence the given
project would enhance shareholders’ wealth and therefore the company should implement
this project (Petty et. al.,, 2015).
b) IRR may be defined as the discount rate which results in the project NPV becoming zero
(Damodaran, 2015). The IRR of the project has come out as 14.76% using the excel
spreadsheet computations. The decision rule with regards to IRR is that the underlying
project must be rejected if IRR is lesser than the cost of capital while it must be accepted if
the IRR tends to exceed that cost of capital (Parrino & Kidwell, 2014). For the given project,
the cost of capital is 13%. Since the IRR is greater than 13%, thence the project would be
considered as financially feasible. As a result, the company should implement this project.