Capital Budgeting Analysis of Drillago Company

This report analyses the financial feasibility of a new investment that Drillago Company seeks to make using key capital budgeting techniques. The report concludes that the project is financially feasible based on quantitative parameters such as NPV, IRR, and payback period.

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.

c) For the given project, both NPV and IRR produced the same result i.e. the project should
be implemented. Amongst the two, the preferred technique is NPV considering the fact that ir
provides accurate measures also when a particular year has net cash outflows. In case of IRR,
these causes potentially lead to multiple answers. Also, with regards to ranking projects, NPV
has an edge over IRR (Brealey, Myers & Allen, 2014).
d) Payback period is defined as the time required in order to recover the original investment
(Damodaran, 2015). Based on the computations performed in Excel spreadsheet, the payback
period for the given project has come out as 6.98 years as indicated below.
The decision rule with regards to payback period is that the project is considered financially
feasible if the payback period lies between 1 year and 7 years. It is apparent that the project
payback period does manage to lie within the acceptable range and hence the given project
would be considered as financially feasible as per the payback period criterion.
Conclusion
Based on the above analysis, it would be appropriate to conclude that the given project has
managed to satisfy all the three different capital budgeting techniques that are used and hence
the project is financially feasible. As a result, the project should be implemented from the
perspective of financial feasibility based on quantitative parameters (Petty et. al., 2015).

References
Brealey, R. A., Myers, S. C. & Allen, F. (2014) Principles of corporate finance, 6th ed. New
York: McGraw-Hill Publications
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York: Wiley,
John & Sons.
Parrino, R. & Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley
Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., & Nguyen, H. (2015).
Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education,
French Forest Australia