Question
In: Finance
A natural gas energy company must choose between two mutually exclusive extraction projects, and each costs...
A natural gas energy company must choose between two mutually exclusive extraction projects, and each costs $12 million. Under Plan D, all the natural gas would be extracted in 1 year, producing a cash flow at t = 1 of $14.4 million. Under Plan E, cash flows would be $2.1 million per year for 20 years. The firm’s WACC is 13%.
a. Construct NPV profiles for Plans D and E, identify each project’s IRR, and show the approximate crossover rate.
b. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 13%? If all available projects with returns greater than 13% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 13% because all the company can do with these cash flows is to replace money that has a cost of 13%? Does this imply that the WACC is the correct reinvestment rate assumption for a project’s cash flows?
Please show all calculations.
Solutions
Expert Solution
SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE
ASSUME PLAN D = PLAN A AND PLAN B = PLAN E
jeff jeffy answered 9 months agoRelated Solutions
An oil-drilling company must choose between two mutually exclusive extraction projects, and each costs $13 million....
An oil-drilling company must choose between two mutually
exclusive extraction projects, and each costs $13 million. Under
Plan A, all the oil would be extracted in 1 year, producing a cash
flow at t = 1 of $15.6 million. Under Plan B, cash flows would be
$2.31 million per year for 20 years. The firm's WACC is 12.3%.
Construct NPV profiles for Plans A and B. Round your answers to
two decimal places. Do not round your intermediate calculations.
Enter...
An oil-drilling company must choose between two mutually exclusive extraction projects, and each costs $12.2 million....
An oil-drilling company must choose between two mutually
exclusive extraction projects, and each costs $12.2 million. Under
Plan A, all the oil would be extracted in 1 year, producing a cash
flow at t = 1 of $14.64 million. Under Plan B, cash flows would be
$2.1678 million per year for 20 years. The firm's WACC is
12.8%.
Construct NPV profiles for Plans A and B. Round your answers to
two decimal places. Do not round your intermediate calculations.
Enter...
An oil-drilling company must choose between two mutually exclusive extraction projects, and each costs $12.8 million....
An oil-drilling company must choose between two mutually
exclusive extraction projects, and each costs $12.8 million. Under
Plan A, all the oil would be extracted in 1 year, producing a cash
flow at t = 1 of $15.36 million. Under Plan B, cash flows would be
$2.2744 million per year for 20 years. The firm's WACC is
12.1%.
Construct NPV profiles for Plans A and B. Round your answers to
two decimal places. Do not round your intermediate calculations.
Enter...
An oil-drilling company must choose between two mutually exclusive extraction projects, and each costs $12 million....
An oil-drilling company must choose between two mutually
exclusive extraction projects, and each costs $12 million. Under
Plan A, all the oil would be extracted in 1 year, producing a cash
flow at t = 1 of $14.4 million. Under Plan B, cash flows would be
$2.1323 million per year for 20 years. The firm's WACC is
11.4%.
Construct NPV profiles for Plans A and B. Round your answers to
two decimal places. Do not round your intermediate calculations.
Enter...
An oil-drilling company must choose between two mutually exclusive extraction projects, and each costs $12.6 million....
An oil-drilling company must choose between two mutually
exclusive extraction projects, and each costs $12.6 million. Under
Plan A, all the oil would be extracted in 1 year, producing a cash
flow at t = 1 of $15.12 million. Under Plan B, cash flows would be
$2.2389 million per year for 20 years. The firm's WACC is
11.7%.
Construct NPV profiles for Plans A and B. Round your answers to
two decimal places. Do not round your intermediate calculations.
Enter...
An oil-drilling company must choose between two mutually exclusive extraction projects, and each costs $11.8 million....
An oil-drilling company must choose between two mutually
exclusive extraction projects, and each costs $11.8 million. Under
Plan A, all the oil would be extracted in 1 year, producing a cash
flow at t = 1 of $14.16 million. Under Plan B, cash flows would be
$2.0967 million per year for 20 years. The firm's WACC is 12%.
Construct NPV profiles for Plans A and B. Round your answers to
two decimal places. Do not round your intermediate calculations.
Enter...
An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial...
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 12.4%. Construct NPV profiles for
Plans A and B. Enter your answers in millions. For...
An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial...
An oil-drilling company must choose between two mutually
exclusive extraction projects, and each requires an initial outlay
at t = 0 of $12.8 million. Under Plan A, all the oil would be
extracted in 1 year, producing a cash flow at t = 1 of $15.36
million. Under Plan B, cash flows would be $2.2744 million per year
for 20 years. The firm's WACC is 11.3%.
Construct NPV profiles for Plans A and B. Enter your answers in
millions. For...
An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial...
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 at t = 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 12.7%.
Construct NPV profiles for Plans A and B. Enter your answers in
millions. For...
An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial...
An oil-drilling company must choose between two mutually
exclusive extraction projects, and each requires an initial outlay
at t = 0 of $12.4 million. Under Plan A, all the oil would be
extracted in 1 year, producing a cash flow at t = 1 of $14.88
million. Under Plan B, cash flows would be $2.2034 million per year
for 20 years. The firm's WACC is 11.6%.
Construct NPV profiles for Plans A and B. Enter your answers in
millions. For...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Based on the loanable funds theory, explain how each of the following changes should impact interest...
- research paper: each student will be responsible for writing an argumentative research paper discussion a topic...
- In java based on the classes provided finish the program per the requirements: ----------------------------------------------Class1 package cardgame;...
- Identify two cultures and analyze the nurturing process within each culture and discuss the impact the...
- Digital security is an increasing concern is the Internet age. In order to protect sensitive information...
- the challenges experienced by companies considering full application of customer retention strategy in the face of...
- Respond to the following in a minimum of 175 words: The flow of a program is...
ADVERTISEMENT