Question
(PLEASE SHOW ALL WORK FOR EACH STEP) 15)NPV PROFILES: TIMING DIFFERENCES An oil-drilling company must choose between two mutually exclusive extraction projects, and each costs
(PLEASE SHOW ALL WORK FOR EACH STEP)
15)NPV PROFILES: TIMING DIFFERENCES
An oil-drilling company must choose between two mutually exclusive extraction projects, and each costs $11.6 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $13.92 million. Under Plan B, cash flows would be $2.0612 million per year for 20 years. The firm's WACC is 12.7%.
Construct NPV profiles for Plans A and B. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. If an amount is zero enter "0". Negative value should be indicated by a minus sign.
Discount Rate | NPV Plan A | NPV Plan B |
0% | $ million | $ million |
5 | million | million |
10 | million | million |
12 | million | million |
15 | million | million |
17 | million | million |
20 | million | million |
Identify each project's IRR. Round your answers to two decimal places. Do not round your intermediate calculations.
Project A %
Project B %
Find the crossover rate. Round your answer to two decimal places. Do not round your intermediate calculations. %
Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12.7%? -Select-YesNoItem 18 If all available projects with returns greater than 12.7% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.7%, because all the company can do with these cash flows is to replace money that has a cost of 12.7%? -Select-YesNoItem 19 Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows? -Select-YesNoItem 20
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