Problem 11-15
NPV profiles: timing differences
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 12.6%.
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% $ {C} million $ {C} million 5 $ {C} million $ {C} million 10 $ {C} million $ {C} million 12 $ {C} million $ {C} million 15 $ {C} million $ {C} million 17 $ {C} million $ {C} million 20 $ {C} million $ {C} 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 12.6%?
-Select-yesnoItem 18
If all available projects with returns greater than 12.6% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.6%, because all the company can do with these cash flows is to replace money that has a cost of 12.6%?
-Select-yesnoItem 19
Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?
-Select-yesnoItem 20
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Problem 11-15
NPV profiles: timing differences
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 12.6%.
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% | $ {C} million | $ {C} million |
5 | $ {C} million | $ {C} million |
10 | $ {C} million | $ {C} million |
12 | $ {C} million | $ {C} million |
15 | $ {C} million | $ {C} million |
17 | $ {C} million | $ {C} million |
20 | $ {C} million | $ {C} 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 12.6%?
-Select-yesnoItem 18
If all available projects with returns greater than 12.6% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.6%, because all the company can do with these cash flows is to replace money that has a cost of 12.6%?
-Select-yesnoItem 19
Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?
-Select-yesnoItem 20
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