Mutually exclusive extraction project-find crossover rate

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Reference no: EM13873788

NPV profiles: timing differences

An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $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 12.6%.

Construct NPV profiles for Plans A and B. Round your answers to two decimal places. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55.

Discount Rate Plan A Plan B

Identify each project's IRR. Round your answers to two decimal places. Project A % Project B %

Find the crossover rate. 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 12.6%?

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%?

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

Reference no: EM13873788

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