An oil drilling company must choose between two mutually exclusive extraction pr
ID: 2632081 • Letter: A
Question
An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $12 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $14.4 million. Under Plan B, cash flows would be $2.1323 million per year for 20 years. The firm's WACC is 11.3%.
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 $....... miliion
20 $....... million $...... million
Identify each project's IRR. Round your answer 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 retuens greater than 11.3%? Yes or No
If all available projects with returns greater than 11.3% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 11.3%, because all the company can do with these cash flows is to replace money that has a cost of 11.3%? Yes or No
Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?
Yes or No
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.
%
Explanation / Answer
do follow it please..............
An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $12 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t=1 of $14.4 million. Under Plan B, cash flows would be $2.1 million per year for 20 years. The firm