Problem Type: NPV Profiles: Timing Differences

An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of

all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $13.44 million. Under Plan B, cash flows would be $1.9901 mill.on

The firm's WACC is 12.1%.

on. Under Plan A, year for 20 years.

a. Construct NPV profiles for Plans A and B. 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 "O". Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.

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. Do not round intermediate calculations. Round your answers to two decimal places.

Project A:_____%

Project B:____%

Determine the crossover rate. Approximate your answer to the nearest whole number.

______%

Part 2 of Problem:

Is it logical to assume that the firm would take on all avilable independent, average-risk projects with returns greater than 12.1%? Answer Yes or No?

If all available projects returns greater than 12.1% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.1%, because all the company can do with these cash flows is to replace money that has a cost of 12.1%? Answer Yes or No?

Does this imply that the WACC is correct reinvestment rate assumption for a projects's cash flows? Answer Yes or No?

Determine the crossover rate. Approximate your answer to the nearest whole number. \% b. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than-12,1\%? If all available projects with returns greater than 12.1% have been undertaken, does this mean that cash flows from past investments have an opportuni cost of only 12.1%, because all the company can do with these cash flows is to replace money that has a cost of 12.1% ? Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows? Continue without saving An oll-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t=0 of $11.2 malion. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t=1 of $13.44 million. Under Plan 8 , cash ffows would be $1.9901 million per year for 20 years. The firm's WACC is 12.19. a. Construct NPV profiles for Plans A and B. 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 values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places. Identify each project's IRR. Do not round intermediate calculations. Round your answers to two decimal places. Project A: Project B: P5