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An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $12.6 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $15.12 million. Under Plan B, cash flows would be $2.2389 million per year for 20 years. The firm's WACC is 12.5%. 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. Discount Rate NPV Plan A 0% 5 10 12 15 17 20 $ million million million million million million million $ NPV Plan B million million million million million million million

An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $12.6 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $15.12 million. Under Plan B, cash flows would be $2.2389 million per year for 20 years. The firm's WACC is 12.5%. 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. Discount Rate NPV Plan A 0% 5 10 12 15 17 20 $ million million million million million million million $ NPV Plan B million million million million million million million

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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. -Select- ✓ % b. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12.5%? -Select- v % % If all available projects with returns greater than 12.5% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.5%, because all the company can do with these cash flows is to replace money that has a cost of 12.5%? -Select- ✓ Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?
Transcribed Image Text: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. -Select- ✓ % b. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12.5%? -Select- v % % If all available projects with returns greater than 12.5% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.5%, because all the company can do with these cash flows is to replace money that has a cost of 12.5%? -Select- ✓ Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?
An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $12.6 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $15.12 million. Under Plan B, cash flows would be $2.2389 million per year for 20 years. The firm's WACC is 12.5%. 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. Discount Rate NPV Plan A 0% 5 10 12 15 17 20 $ million million million million million million million $ NPV Plan B million million million million million million million
Transcribed Image Text:An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $12.6 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $15.12 million. Under Plan B, cash flows would be $2.2389 million per year for 20 years. The firm's WACC is 12.5%. 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. Discount Rate NPV Plan A 0% 5 10 12 15 17 20 $ million million million million million million million $ NPV Plan B million million million million million million million
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