The Ewert Exploration Company is considering two mutually exclusive plans for extracting oil on property for which it has mineral rights. Both plans call for the expenditure of $$10\mathrm{.}5$ million to drill development wells. Under Plan A$,$ all the oil will be extracted in $1$ year, producing a cash flow at t $=1$ of $$13\mathrm{.}5$ million; under Plan B$,$ cash flows will be $$2$ million per year for $20$ years.

What are the annual incremental cash flows that will be available to Ewert Exploration if it undertakes Plan B rather than Plan A$?($Hint: Subtract Plan A$\text{'}$s flows from B$\text{'}$s$.)$ Enter your answers in millions. For example, an answer of $$1\mathrm{.}23$ million should be entered as $1\mathrm{.}23,$ not $1,230,000.$ Round your answers to two decimal places. Use a minus sign to enter cash outflows, if any.

Year Incremental Cash Flow $($B $-$ A$)$

$1$ $

million

$2-20$ $

million

If the company accepts Plan A and then invests the extra cash generated at the end of Year $1,$ what rate of return $($reinvestment rate$)$ would cause the cash flows from reinvestment to equal the cash flows from Plan B$?$ Round your answer to two decimal places.

$\%$

Suppose a firm's cost of capital is $10\%.$ Is it logical to assume that the firm would take on all available independent projects $($of average risk$)$ with returns greater than $10\%?$ Further, if all available projects with returns greater than $10\%$ have been taken, would this mean that cash flows from past investments would have an opportunity cost of only $10\%$ because all the firm could do with these cash flows would be to replace money that has a cost of $10\%?$ Finally, does this imply that the cost of capital is the correct rate to assume for the reinvestment of a project's cash flows?

I. No$,$ the firm would not take on all available independent projects with greater than $10\%$ returns. If taken, risk remains the same among projects and the cost of capital does not vary with the amount of capital raised.

II$.$ Yes, the firm would take on all available independent projects with greater than $10\%$ returns. If taken, risk varies with projects and the cost of capital varies with the amount of capital raised.

III. Yes, the firm would take on all available independent projects with greater than $10\%$ returns. If taken, risk remains the same among projects and the cost of capital does not vary with the amount of capital raised.

III

Select the correct graph for NPV profiles for Plans A and B$.$

The correct graph is

graph A

$.$

Identify each project's IRR. Round your answers to two decimal places.

Project A:

$\%$

Project B:

$\%$

Indicate the crossover rate. Round your answer to two decimal places.

$\%$