## 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%.

- 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.

% - 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

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