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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 $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 12.6%. 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 0% NPV Plan A million NPV Plan B million 5 million million 10 10 million million 12 12 million million 15 million million 17 million million 20 20 million million Identify each project's IRR. Do not round intermediate calculations. Round your answers to two decimal places. Project A: Project B: % % Determine the crossover rate. Approximate your answer to the nearest whole number. % b. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12.6%? -Select- If all available projects with returns greater than 12.6% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.6%, because all the company can do with these cash flows is to replace money that has a cost of 12.6%? -Select- Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows? -Select-

An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $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 12.6%. 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 0% NPV Plan A million NPV Plan B million 5 million million 10 10 million million 12 12 million million 15 million million 17 million million 20 20 million million Identify each project's IRR. Do not round intermediate calculations. Round your answers to two decimal places. Project A: Project B: % % Determine the crossover rate. Approximate your answer to the nearest whole number. % b. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12.6%? -Select- If all available projects with returns greater than 12.6% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.6%, because all the company can do with these cash flows is to replace money that has a cost of 12.6%? -Select- Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows? -Select-

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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An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $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 12.6%. 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 0% $ 5 NPV Plan A million $ million NPV Plan B million million 10 million million 12 million million 15 million million 17 20 million million million million Identify each project's IRR. Do not round intermediate calculations. Round your answers to two decimal places. Project A: Project B: % % Determine the crossover rate. Approximate your answer to the nearest whole number. % b. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12.6%? -Select- ✓ If all available projects with returns greater than 12.6% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.6%, because all the company can do with these cash flows is to replace money that has a cost of 12.6%? -Select- ✓ Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows? -Select- ✓
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 $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 12.6%. 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 0% $ 5 NPV Plan A million $ million NPV Plan B million million 10 million million 12 million million 15 million million 17 20 million million million million Identify each project's IRR. Do not round intermediate calculations. Round your answers to two decimal places. Project A: Project B: % % Determine the crossover rate. Approximate your answer to the nearest whole number. % b. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12.6%? -Select- ✓ If all available projects with returns greater than 12.6% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.6%, because all the company can do with these cash flows is to replace money that has a cost of 12.6%? -Select- ✓ Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows? -Select- ✓
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