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An oil company is considering changing the size of a small pump that is currently...

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Finance

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An oil company is considering changing the size of a small pump that is currently operational in wells in an oil field. If this pump is kept, it will extract 50% of the known crude-oil reserve in the first year of its operation and the remaining 50% in the second year. A pump larger than the current pump will cost $1.6 million, but it will extract 100% of the known reserve in the first year. The total oil revenues over the two years are the same for both pumps, namely, $20 million.|| The advantage of the large pump is that it allows 50% of the revenues to be realized a year earlier than with the small pump. If the firm's MARR is known to be 20 % , what do you recommend based on the IRR criterion? Confirm your answer using PW analysis Larger pump Current pump $1.6 million $20 million 0 Investment, year 0 Revenue, year 1 Revenue, year 2 $10 million $10 million 0

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