Question

X ework An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t 0 of $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 12.2 %. 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 "0". Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places NPV Plan B NPV Plan A Discount Rate million million 0% million million 5 10 million million million million 12 million million 15 million 17 million 20 million million 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. % b. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12.2 %7 -Select- If all available projects with returns greater than 12.2 % have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.2%. hecause all the company can do with these cash flows is to replace money that has a cost of 12.2 %? un

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins E AutoSum - Cut AC Wrap Text Calibri 11 General Copy Fill Merge & Center Conditional Format Formatting as Table Styles Insert Delete Format Paste в IU* +.0 .00 Cell Sort & Find & % .00 0 Format Painter Clear Filter Select Number Editing Clipboard Font Alignment Styles Cells fox LP308 LU LK LL LM LN LO LP LQ LR LS LT LU LV PLAN B 289 YEAR PLAN A [=NPV(LP293,$LL$291) $LL$290] (a) NPV PROFILE 290 -12 -12 291 2.1323 DISCOUNT 1 14.4 NPV PLAN B $ 30.65 $ 14.57 292 2 2.1323 RATE PLAN A [-NPV(LP293,$LM$291:$LM$310) +$LM$290] $2.40 2.1323 293 3 0% $1.71 294 4 0 2.1323 5% $1.09 $6.15 2.1323 295 5 0 10% $ 3.93 $0.86 2.1323 296 6 0 12% $0.52 $1.35 297 7 0 2.1323 15% $0.31 $0.00 2.1323 17% 298 8. 0 299 0.00 $-1.62 0 2.1323 20% 2.1323 300 10 0 2.1323 IRR 301 11 0 2.1323 302 12 0 PLAN A 20% SEE ABOVE NPV PROFILE 303 13 0 2.1323 PLAN B 17% SEE ABOVE NPV PROFILE 304 14 0 2.1323 305 2.1323 15 0 306 16 0 2.1323 2.1323 307 17 0 308 18 0 2.1323 309 19 0 2.1323 2.1323 310 20 311 IRRnpvbeta STEIN iO NPV RELEVANT RATION PBP ARR invest, EAA MI-np-ir REPLACEMENT S HPR GMAM EAC MACRS BETA LEVERED REPLACEMENT BOND OPTION TO WAIT E 110% Rea erences: KS336 WA 07:47 EENG 30-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins E AutoSum- Cut AC Wrap Text Calibri 11 General Copy Fill Merge & Center Paste в IU* +.0 .00 Conditional Format Cell Insert Delete Format Sort & Find & % .00 0 Format Painter Clear Filter Select Formatting as Table Styles Clipboard Editing Font Alignment Number Styles Cells fox LP326 LUJ LK LL LM LN LO LP LQ LR LS LT LU LV INCREMENTAL CFAT (PLAN B -PLAN A) 313 YEAR PLAN A PLAN B 314 -12 -12 0 315 2.1323 -12.2677 14.4 crossover rate 316 2 2.1323 2.1323 16.41% IRR 2.1323 317 3 2.1323 EIRR(LN314:LN334)] 318 4 0 2.1323 2.1323 2.1323 2.1323 319 5 0 2.1323 2.1323 320 6 0 2.1323 2.1323 321 7 0 2.1323 322 8 0 2.1323 2.1323 323 9 0 2.1323 324 10 0 2.1323 2.1323 325 11 0 2.1323 2.1323 326 2.1323 12 0 2.1323 327 13 0 2.1323 2.1323 2.1323 328 14 0 2.1323 329 2.1323 2.1323 15 0 330 16 2.1323 2.1323 331 17 0 2.1323 2.1323 2.1323 332 18 2.1323 2.1323 333 19 2.1323 334 20 2.1323 2.1323 IRRnpvbeta erences: KS336 STEIN iO NPV RELEVANT MI-пр-ir RATION PBP ARR invest, EAA REPLACEMENT S HPR GMAM EAC MACRS BETA LEVERED REPLACEMENT BOND OPTION TO WAIT III E 110% II Rea WA 07:47 ENG 30-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins E AutoSum - Cut AC Wrap Text Calibri 11 General Copy Fill Merge & Center Paste в IU* +.0 .00 .00 0 Conditional Format Cell Insert Delete Format Sort & Find & % Format Painter Clear Filter Select Formatting as Table Styles Number Editing Clipboard Font Alignment Styles Cells fr LM347 LK LL LM LN LO LP LQ LS LT LU 335 336 337 338 fill in the blanks 339 340 341 YES FIRM WOULD TAKE ALL PROJECTS WITH RETURN GREATER THAN 12.2% 342 TRUE 343 YES 344 345 YES TRUE 346 347 348 349 350 351 352 353 IRRnpvbeta STEIN iO MI-пр-ir NPV RATION PBP ARR invest, EAA REPLACEMENTS HPR GMAM EAC MACRS RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT E 130% Rea erences: E147 WA 07:48 EENG 30-11-2019 LR