Question

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 12.4%.

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

0% $------- million $-------- million

5 ------- million ------- million

10 -------- million -------- million

12 --------million -------- million

15 --------- million --------- million

17 --------- million ---------- million

20 ---------million ----------million

1. 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.

   ----------- %

2. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12.4%?

   Yes or no

   If all available projects with returns greater than 12.4% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.4%, because all the company can do with these cash flows is to replace money that has a cost of 12.4%? Yes or no

Answer 1