In: Finance
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 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 value should be indicated by a minus sign.
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. Round your answers to two decimal
places. Do not round your intermediate calculations.
Project A %
Project B %
Find the crossover rate. Round your answer to two decimal places.
Do not round your intermediate calculations.
%
- Is it logical to assume that the firm would take on all
available independent, average-risk projects with returns greater
than 11.7%?
-Select-YesNoItem 18
If all available projects with returns greater than 11.7% have been
undertaken, does this mean that cash flows from past investments
have an opportunity cost of only 11.7%, because all the company can
do with these cash flows is to replace money that has a cost of
11.7%?
-Select-YesNoItem 19
Does this imply that the WACC is the correct reinvestment rate
assumption for a project's cash flows?
-Select-YesNo