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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.
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 12%?
-Select-yesnoItem 18

If all available projects with returns greater than 12% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12%, because all the company can do with these cash flows is to replace money that has a cost of 12%?
-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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Keith Leannon
Keith LeannonLv2
28 Sep 2019
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