Identify each project irr and indicate crossover rate

Assignment Help Financial Management

Reference no: EM132023605

1) The Ewert Exploration Company is considering two mutually exclusive plans for extracting oil on property for which it has mineral rights. Both plans call for the expenditure of $10 million to drill development wells. Under Plan A, all the oil will be extracted in 1 year, producing a cash flow at t = 1 of $12 million; under Plan B, cash flows will be $1.75 million per year for 20 years.

a. What are the annual incremental cash flows that will be available to Ewert Exploration if it undertakes Plan B rather than Plan A? (Hint: Subtract Plan A’s flows from B‘s.)

b. If the company accepts Plan A and then invests the extra cash generated at the end of Year 1, what rate of return (reinvestment rate) would cause the cash flows from reinvestment to equal the cash flows from Plan B?

c. Suppose a firm ’ s cost of capital is 10%. Is it logical to assume that the firm would take on all available independent projects (of average risk) with returns greater than 10%? Further, if all available projects with returns greater than 10% have been taken, would this mean that cash flows from past investments would have an opportunity cost of only 10%, because all the firm could do with these cash flows would be to replace money that has a cost of 10%? Finally, does this imply that the cost of capital is the correct rate to assume for the reinvestment of a project ’ s cash flows?

d. Construct NPV profiles for Plans A and B, identify each project’s IRR, and indicate the crossover rate.

Reference no: EM132023605

Questions Cloud

Two mutually exclusive machines : The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future.

What is the equivalent annual annuity for each machine : Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. What is the equivalent annual annuity for each machine.

What is the equivalent annual annuity for each plane : Shao Airlines is considering two alternative planes. What is the equivalent annual annuity for each plane?

Clearer picture of leadership risk : Which story gives a clearer picture of leadership risk?

Identify each project irr and indicate crossover rate : Construct NPV profiles for Plans A and B, identify each project’s IRR and indicate the crossover rate.

Strategic or situational leadership : When things went bad, he acknowledged reality. Did he display both strategic or situational leadership?

What function inside an organization : What function inside an organization should be responsible for its whistleblower policies?

Type of strategic risk to industrial-age organizations : What type of strategic risk to industrial-age organizations are there? What company today could pose a strategic risk to to Macy's.

Development of a future airplane : Of Boeing and Airbus, which company made the best decision on strategic risks facing the development of a future airplane?

User Account

All Pages