(Questions in part B have Yes or no answers)
An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $11.4 million Under Plan A, all the oil would be extracted in 1 year, producing a cash flow att = 1 of $13.68 million. Under Plan B, cash flows would be $2.0257 million per year for 20 years. The firm's WACC is 11% 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. Discount Rate NPV Plan A NPV Plan B million million 0% $ million million million million 10 million 12 million million million 15 million million 17 million million 20 Identify each project's IRR. Do not round intermediate calculations. Round your answers to two decimal places. Project A Project B Find the crossover rate. Do not round intermediate calculations. Round your answer to two decimal places. b. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 11%? -Select- If all available projects with returns greater than 11% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 11%, because all the company can do with these cash flows is to replace money that has a cost of 11%? -Select- Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows? -Select- An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $11.4 million Under Plan A, all the oil would be extracted in 1 year, producing a cash flow att = 1 of $13.68 million. Under Plan B, cash flows would be $2.0257 million per year for 20 years. The firm's WACC is 11% 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. Discount Rate NPV Plan A NPV Plan B million million 0% $ million million million million 10 million 12 million million million 15 million million 17 million million 20 Identify each project's IRR. Do not round intermediate calculations. Round your answers to two decimal places. Project A Project B Find the crossover rate. Do not round intermediate calculations. Round your answer to two decimal places. b. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 11%? -Select- If all available projects with returns greater than 11% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 11%, because all the company can do with these cash flows is to replace money that has a cost of 11%? -Select- Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows? -Select
