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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%.

  1. 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.
    %

  2. 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

Solutions

Expert Solution

As nothing was mentioned excel is used.


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