60.1K

Verified Solution

Link Copied!

NPV profiles: timing differences

An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $12.4 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $14.88 million. Under Plan B, cash flows would be $2.2034 million per year for 20 years. The firm's WACC is 13%.

Construct NPV profiles for Plans A and B. Round your answers to two decimal places. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55.

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. Project A % Project B % Find the crossover rate. Round your answer to two decimal places. %

Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 13%? -Select-yes / no If all available projects with returns greater than 13% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 13%, because all the company can do with these cash flows is to replace money that has a cost of 13%? -Select-yes / no Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows? -Select-yes / no

Answer & Explanation Solved by verified expert

See Answer