Reference no: EM133073075

Question - An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $11 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $13.2 million. Under Plan B, cash flows would be $1.9546 million per year for 20 years. The firm's WACC is 13%.

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.

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.

Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 13%?

If all available projects with returns greater than 13% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 13%, because all the company can do with these cash flows is to replace money that has a cost of 13%?

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