Question

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%.

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. 
   
3. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 11.4%?
   -Select-YesNo
   
   If all available projects with returns greater than 11.4% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 11.4%, because all the company can do with these cash flows is to replace money that has a cost of 11.4%?
   -Select-YesNo
   
   Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?

Answer 1