An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $11.4 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $13.68 million. Under Plan B, cash flows would be $2.0257 million per year for 20 years. The firm's WACC is 11.4%. 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 Identify each project's IRR. Do not round intermediate calculations. Round your answers to two decimal places. Project A: % Project B: % Determine the crossover rate. Approximate your answer to the nearest whole number. % Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 11.4%? 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%? Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?
An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $11.4 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $13.68 million. Under Plan B,
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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 Identify each project's
IRR . Do not round intermediate calculations. Round your answers to two decimal places.Project A: %
Project B: %
Determine the crossover rate. Approximate your answer to the nearest whole number.
%
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Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 11.4%?
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%?
Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?
IRR is a rate at which the present value of cash inflows is equal to the present value of cash outflows. (i.e; The NPV is 0 at IRR).
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