Question
Petrobras is considering the following two projects: Project A involves purchasing a Suezmax size oil tanker to be used in South America, while Project B
Petrobras is considering the following two projects: Project A involves purchasing a Suezmax size oil tanker to be used in South America, while Project B involves purchasing a VLCC (very large crude carriers) tanker to be deployed to the Middle East. The estimated cash flows from the projects are as follows (in $ million):
Year | 0 | 1 | IRR | NPV (@10%) |
Project A | -10 | 20 |
|
|
Project B | -20 | 35 |
|
|
1. Calculate the Internal Rate of Return (IRR) and Net Present Value (NPV) of projects A and B. Assume that the risk-adjusted discount rate is 10%.
2. Based on the IRR rule, which project is preferred? How about based on the NPV rule?
3. Petrobras experienced a severe problem financing its investment projects after the recent decline in oil price. Assuming that the firm had secured only $20m of capital to invest, which project should Petrobras choose? Why?
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