Operations off the coast, Deep Water Drilling has

Operations off the coast

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Reference no: EM13950078

Deep Water Drilling has operations off the coast of South America helping its clients (principally sovereign oil companies) tap into oil reserves located more than 10,000 feet below sea level. The Company estimates that increased demand for its services over the next three years will allow it to operate profitably four additional drilling rigs. After three years demand is expected to return to current levels, at which time any excess rigs can be sold for $25 million each. Each rig generates quarterly net cash flows of $15 million, payable in arrears. The acquisition cost of each rig is $200 million. The Company’s cost of capital is 6%. If Deep Water Drilling can add one rig every-six months, how many should it acquire, and why? (Please show your work)

Reference no: EM13950078

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