Explanation is necessary. Pls concept An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initialoutlay 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 11.3%.Construct NPV profiles for Plans A and B. Enter your answers in millions. For example, an answer of $10,550,000 shouldbe entered as 10.55. If an amount is zero, enter "0". Negative values, if any, should be indicated by a minus sign. Do notround intermediate calculations. Round your answers to two decimal places.Discount Rate NPV Plan A NPV Plan B051012151720%$ million$ millionmillionmillionmillionmillionmillionmillionmillionmillionmillionmillionmillionmillionIdentify each project's IRR. Do not round intermediate calculations. Round your answers to two decimal places.Project A: %Project B: %

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Description: Explanation is necessary. Pls concept An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initialoutlay at t = 0 of $12.8 million. Under Plan A, all the oil would be extracted in 1 year, produc

WACC:Weighted average cost of capital (WACC) represents a company's average after-tax cost of…

Answered: Construct NPV profiles for Plans A and…

Business

Finance

Construct NPV profiles for Plans A and B. B

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 14P

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Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?
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The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?
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Staten Corporation is considering two mutually exclusive projects. Both require an initial outlay of 150,000 and will operate for five years. The cash flows associated with these projects are as follows: Statens required rate of return is 10%. Using the net present value method and the present value table provided in Appendix A, which of the following actions would you recommend to Staten? a. Accept Project X and reject Project Y. b. Accept Project Y and reject Project X. c. Accept Projects X and Y. d. Reject Projects X and Y.
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