Question

An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $11.6 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $13.92 million. Under Plan B, cash flows would be $2.0612 million per year for 20 years. The firm's WACC is 12.1%.

Construct NPV profiles for Plans A and B. 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 values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.

Discount Rate NPV Plan A NPV Plan B

0

5

10

12

15

17

20

Identify each project's IRR. Do not round intermediate calculations. Round your answers to two decimal places.

Project A: %

Project B: %

Find the crossover rate. Do not round intermediate calculations. 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 12.1%?

If all available projects with returns greater than 12.1% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.1%, because all the company can do with these cash flows is to replace money that has a cost of 12.1%?

Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?

Answer #1

An oil-drilling company must choose between two mutually
exclusive extraction projects, and each requires an initial outlay
at t = 0 of $11.6 million. Under Plan A, all the oil would be
extracted in 1 year, producing a cash flow at t = 1 of $13.92
million. Under Plan B, cash flows would be $2.0612 million per year
for 20 years. The firm's WACC is 12.7%.
Construct NPV profiles for Plans A and B. Enter your answers in
millions. For...

An oil-drilling company must choose between two mutually
exclusive extraction projects, and each requires an initial outlay
at t = 0 of $11.6 million. Under Plan A, all the oil would be
extracted in 1 year, producing a cash flow at t = 1 of $13.92
million. Under Plan B, cash flows would be $2.0612 million per year
for 20 years. The firm's WACC is 11.3%.
Construct NPV profiles for Plans A and B. Enter your answers in
millions. For...

An oil-drilling company must choose between two mutually
exclusive extraction projects, and each requires an initial outlay
at t = 0 of $11.6 million. Under Plan A, all the oil would be
extracted in 1 year, producing a cash flow at t = 1 of $13.92
million. Under Plan B, cash flows would be $2.0612 million per year
for 20 years. The firm's WACC is 12.2%.
Construct NPV profiles for Plans A and B. Enter your answers in
millions. For...

An oil-drilling company must choose between two mutually
exclusive extraction projects, and each requires an initial outlay
at t = 0 of $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 12.2%.
Construct NPV profiles for Plans A and B. Enter your answers in
millions. For...

An oil-drilling company must choose between two mutually
exclusive extraction projects, and each requires an initial outlay
at t = 0 of $11 million. Under Plan A, all the oil would be
extracted in 1 year, producing a cash flow at t = 1 of $13.2
million. Under Plan B, cash flows would be $1.9546 million per year
for 20 years. The firm's WACC is 12.8%.
Construct NPV profiles for Plans A and B. Enter your answers in
millions. For...

An oil-drilling company must choose between two mutually
exclusive extraction projects, and each requires an initial outlay
at t = 0 of $12.8 million. Under Plan A, all the oil would be
extracted in 1 year, producing a cash flow at t = 1 of $15.36
million. Under Plan B, cash flows would be $2.2744 million per year
for 20 years. The firm's WACC is 11.1%.
Construct NPV profiles for Plans A and B. Enter your answers in
millions. For...

An oil-drilling company must choose between two mutually
exclusive extraction projects, and each requires an initial outlay
at t = 0 of $12.8 million. Under Plan A, all the oil would be
extracted in 1 year, producing a cash flow at t = 1 of $15.36
million. Under Plan B, cash flows would be $2.2744 million per year
for 20 years. The firm's WACC is 11.3%.
Construct NPV profiles for Plans A and B. Enter your answers in
millions. For...

A company is considering two mutually exclusive expansion plans.
Plan A requires a $40 million expenditure on a large-scale
integrated plant that would provide expected cash flows of $6.39
million per year for 20 years. Plan B requires a $12 million
expenditure to build a somewhat less efficient, more
labor-intensive plant with an expected cash flow of $2.69 million
per year for 20 years. The firm's WACC is 11%. The data has been
collected in the Microsoft Excel Online file...

A company has a 12% WACC and is considering two mutually
exclusive investments (that cannot be repeated) with the following
cash flows:
0
1
2
3
4
5
6
7
Project A
-$300
-$387
-$193
-$100
$600
$600
$850
-$180
Project B
-$400
$135
$135
$135
$135
$135
$135
$0
What is each project's NPV? Negative values, if any, should be
indicated by a minus sign. Do not round intermediate calculations.
Round your answers to the nearest cent.
Project A:...

A company has a 13% WACC and is considering two mutually
exclusive investments (that cannot be repeated) with the following
cash flows:
0
1
2
3
4
5
6
7
Project A
-$300
-$387
-$193
-$100
$600
$600
$850
-$180
Project B
-$405
$134
$134
$134
$134
$134
$134
$0
The data has been collected in the Microsoft Excel Online file
below. Open the spreadsheet and perform the required analysis to
answer the questions below.
Open spreadsheet
What is each...

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