Question

An il-drilling company must choose between two mutually exclusive extraction projects, and each requires an intial outlay at 0 of $13 million Under Plan A, all the oil would be extracted in 1 year producng a cash flow at1 of $15.6 million. Under Plan B cash flows would be $2.31 million per year for 20 years. The firm's WACC is 12.7 a. 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 'o'. Negative values, any should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places DISCO Date NPV PIA HP Plane million milion million million million million million million million million million million million million Identify each project's RR. Do not round intermediate calculations. Round your answers to two decimal places Project Project Find the crossoverre. Do round termediate Calculations. Round your answer to two decimal places 7 b. Is it logical to assume that the form would take on all available independent, average-risk projects with retums greater than 12.7 -Select If all available projects with returns greater than 12.7 have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.79, because all the company can do with these cash flow is to replace money that has a cost of 12.7% Select Does this imply that the WAOC is the correct rewestent rate assumption for a project's cash flows? Select

Answer 1

Please see the table below. The cells highlighted in yellow contain your answer. Figures in parenthesis, if any, mean negative values. All financials are in $ million. Adjacent cells in blue contain the formula in excel I have used to get the final output.

V X Z AA АВ AC AD АЕ Discount NPV Rate NPV Plan A Plan B Plan A Plan B Year 163 Excel formula for NPV of Plan A Excel formula for NPV of Plan A Plan A Plan B (13.00) 33.20-NPV(SAA164,w$165:W$184)+W$164 NPV(SAA164,X$165:X$184)+X$164 15.79NPV(SAA165,W$165:W$184)+W$164-NPV(SAA165,X$165:X$184)+X$164 6.67 NPV(SAA166,W$165:W$184)+W$164 '=NPV(SAA166,X$165:X$184)+X$164 1.46-NPV(SAA167,W$165:W$184)+W$164=NPV(SAA167,X$165:X$184)+X$164 (1.75)-NPV(SAA168,W$165:W$184)+W$164 -NPV(SAA168,X$165:X$184)+X$164 0 (13.00) 0 % 2.60 164 2.31 13.29 1 15.60 5.00% 165 1.86 2 2.31 (2.31) 10.00 % 166 1.18 3 2.31 (2.31) 0.57 167 15.00% 2.31 (2.31) 4 20.00% 168 5 2.31 (2.31) 169 6 2.31 (2.31) 170 (2.31) 2.31 171 8 2.31 (2.31) 172 2.31 (2.31) 173 2.31 (2.31) 10 174 (2.31) 11 2.31 175 2.31 (2.31) 12 176 13 2.31 (2.31) 177 2.31 (2.31) 14 178 2.31 15 (2.31) 179 16 2.31 (2.31) 180 (2.31) 17 2.31 181 18 2.31 (2.31) 182 2.31 19 (2.31) 183 20 2.31 (2.31) 184 20.00% 16.41 % 17.00% 185 IRR IRR(W164:W184)IRR(X164: X184-IRR (Y164: Y 184) 186

Part (a)

NPV profiles are there in the rightmost table

IRR of project A = 20.00%  

IRR of project B = 17.00%  

Cross over rate = IRR of Plan A - Plan B = 16.41%

Part (b)

Yes,

Yes

Yes