Question

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%.

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%	$	$
   5
   10
   12
   15
   17
   20

   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 12.8%?
   -Select-YesNoItem 18
   
   If all available projects with returns greater than 12.8% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.8%, because all the company can do with these cash flows is to replace money that has a cost of 12.8%?
   -Select-YesNoItem 19
   
   Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?
   -Select-YesNo

Answer 1