NPV profiles: timing differences An oil drilling company must choose between

$8.00

Description

NPV profiles: timing differences

An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $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 11.7%.

  1. 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.
    %

  2. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 11.7%?
    -Select-yesnoItem 18
    If all available projects with returns greater than 11.7% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 11.7%, because all the company can do with these cash flows is to replace money that has a cost of 11.7%?
    -Select-yesnoItem 19
    Does this imply that the WACC is the correct reinvestment rate assumption for a project’s cash flows?
    -Select-yesnoItem 20

Reviews

There are no reviews yet.

Be the first to review “NPV profiles: timing differences An oil drilling company must choose between”

Your email address will not be published. Required fields are marked *