Question

An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $11.2 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $13.44 million. Under Plan B, cash flows would be $1.9901 million per year for 20 years. The firm's WACC is 11.5%.

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	%	$    million	$    million
   5		million	million
   10		million	million
   12		million	million
   15		million	million
   17		million	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.

     %

2. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 11.5%?

   -Select-Yes/No

   If all available projects with returns greater than 11.5% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 11.5%, because all the company can do with these cash flows is to replace money that has a cost of 11.5%?

   -Select-Yes/No

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

-Select-Yes/No

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

5% 296 297 projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins - 2x % Cut Σ AutoSum : A Calibri 11 A A = = = V Wrap Text General E Copy Fill Paste BI U DA * SF Merge Merge & Center Center $ - % % 4:0 .00 8. Conditional Format Cell Insert Delete Format Sort & Format Painter Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing LP308 fix U LK LL LM LN LO LP LQ LR L S LU T LV 289 YEAR PLAN A PLAN B 290 0 -11.2 -11.2 (a) NPV PROFILE [=NPV(LP293,$LL$291) + $LL$290] 291 13.44 1.9901 DISCOUNT NPV 292 0 1.9901 RATE PLAN A PLAN B 293 1.9901 0% $ 2.24 $28.60 - > (=NPV(LP293,$LM$291:$LM$310) +$LM$290) 294 1.9901 $ 1.60 $ 13.60 295 1.9901 10% $ 1.02 $5.74 1.9901 12% $ 0.80 $ 3.66 1.9901 15% $ 0.49 $ 1.26 298 1.9901 17% $ 0.29 $ -0.00 299 1.9901 20% $ 0.00 $ -1.51 1.9901 301 1.9901 IRR 1.9901 PLAN A 20% SEE ABOVE NPV PROFILE 303 1.9901 PLAN B 17% SEE ABOVE NPV PROFILE 304 1.9901 305 1.9901 1.9901 307 1.9901 1.9901 309 1.9901 310 1.9901 311 N IRRnpvbetaRATION PBP ARR invest, EAA MI-np-ir REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAITSTEIN IDI O Rea ferences: NL296 BO) 110% - ... * * *O ENG 01-12-2019 300 302 306 308 R

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut Σ AutoSum : A Fill Z 8 . Conditional Format Formatting as Table Styles Cell Styles Insert Delete Format 2 Clear Sort & Filter Editing Find & Select Cells LQ LS LT LU L V 0 316 crossover rate IRR 16.41% [=IRR(LN314:LN334)] 319 320 Calibri 11 A A = = = V Wrap Text General E Copy Paste BI U DA Merge & Center - $ Format Painter % Clipboard Font Alignment Number LP334 U LK LL LM LN LO LP 313 YEAR PLAN A PLAN B INCREMENTAL CFAT (PLAN B -PLAN A) 314 -11.2 -11.2 315 13.44 1.9901 -11.4499 1.9901 1.9901 317 1.9901 1.9901 318 1.9901 1.9901 1.9901 1.9901 1.9901 1.9901 321 1.9901 1.9901 322 1.9901 1.9901 323 1.9901 1.9901 324 1.9901 1.9901 325 1.9901 1.9901 326 1.9901 1.9901 1.9901 1.9901 328 1.9901 1.9901 329 1.9901 1.9901 330 1.9901 1.9901 331 1.9901 1.9901 332 18 1.9901 1.9901 333 19 0 1.9901 1.9901 334 20 0 1 .9901 1.9901 I RRnpvbeta RATION PBP ARR invest, EAA MI-np-ir REPLACEMENT S HPR GMAM EAC MACRS Rea ferences: NL296 327 NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAITSTEIN II BOI 110% _ 9 * OENG 01-12-2019 2.

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut Σ AutoSum : A = = = V Wrap Text & Autosum * General B Calibri 11 A A BI U DA - Font E Copy Paste Format Painter Clipboard Merge & Center - $ % 48.. Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Fill 2 Clear Sort & Filter Editing Find & Select Alignment Number Cells LN350 LK LL LM EN LO LP LQ LR LS LT LU LV 335 336 337 338 fill in the blanks 339 340 341 YES FIRM WOULD TAKE ALL PROJECTS WITH RETURN GREATER THAN 11.5% 342 343 344 YES TRUE 345 YES TRUE 346 347 348 349 350 351 352 353 354 355 H invest, EAA MI-np-ir REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT I RRnpvbeta RATION PBP ARR ferences: SM219 Rea BOND OPTION TO WAITSTEIN II BOJ 120% - _ + 199 * 10 ENG 01-12-2019 ...B