NPV profiles: timing differences
An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $12.6 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $15.12 million. Under Plan B, cash flows would be $2.2389 million per year for 20 years. The firm's WACC is 12.2%.
a. 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.
_____%
b. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12.2%? Yes or No
If all available projects with returns greater than 12.2% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.2%, because all the company can do with these cash flows is to replace money that has a cost of 12.2%? Yes or No
Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows? Yes or No
NPV profiles: timing differences
An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $12.6 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $15.12 million. Under Plan B, cash flows would be $2.2389 million per year for 20 years. The firm's WACC is 12.2%.
a. 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.
_____%
b. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12.2%? Yes or No
If all available projects with returns greater than 12.2% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.2%, because all the company can do with these cash flows is to replace money that has a cost of 12.2%? Yes or No
Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows? Yes or No
Related questions
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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| NPV profiles: timing differences An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $13 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $15.6 million. Under Plan B, cash flows would be $2.31 million per year for 20 years. The firm's WACC is 12%. 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.
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. % Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12%? |
Problem 11-15
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 11.8%.
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% | $ 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. 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.
%
Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 11.8%?
-Select-yesnoItem 18
If all available projects with returns greater than 11.8% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 11.8%, because all the company can do with these cash flows is to replace money that has a cost of 11.8%?
-Select-yesnoItem 19
Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?
-Select-yesnoItem 20
