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Oliver Oil Rigs is considering the purchase of a new drill for its mining operation. Oliver...

Oliver Oil Rigs is considering the purchase of a new drill for its mining operation. Oliver is currently financed 100% with equity and the new drill investment has similar risks to Oliver's prior investment projects. What cost of capital measure should Oliver use to calculate the NPV of the drill purchase?

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Answer : While evaluating the NPV of the drill purchase the Oliver Oil Rigs should use Cost of Equity as its cost of capital measure as given that the firm is financed 100% with equity and the new drill investment has similar risks to Oliver's prior investment projects. In case the firm consists of more than one security then Weighted Average cost is used to use as a discount rate while calculating Net Present value . But since in the case of Oliver Oil Rigs it is 100% equity financed so Cost of Equity measure should Oliver use in order to calculate the NPV of the drill purchase

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