Project S requires an initial outlay at t = 0 of $14,000, and its expected cash flows would be $4,000 per year for 5 years. Mutually exclusive Project L requires an initial outlay at t = 0 of $25,000, and its expected cash flows would be $12,900 per year for 5 years. If both projects have a WACC of 12%, which project would you recommend?

Select the correct answer.

a. Neither Project S nor L, because each project's NPV < 0.

b. Project L, because the NPVL > NPVS.

c. Both Projects S and L, because both projects have IRR's > 0.

d. Both Projects S and L, because both projects have NPV's > 0.

e. Project S, because the NPVS > NPVL.

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

1. 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.

   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.

   ____%

2. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12%?

   -Yes or no?

   If all available projects with returns greater than 12% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12%, because all the company can do with these cash flows is to replace money that has a cost of 12%?

   -Yes or No?

   Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?

   -Yes or No?