10. The Ross Oil Exploration Company is considering two mutually exelusive plans

Question

10. The Ross Oil Exploration Company is considering two mutually exelusive plans on property these projects is 6%. for which it has mineral rights. Both plans have the following cash nows for extracting oil required return on Plan A Plan B (400) 250 280 0 ($500) 320 340 104.48 NPV IRR 20.56% a. Net present value (NPV) for Plan B. (2 points) b. Internal rate of return (IRR) for Plan A. (2 points) c. Which Plan should be selected and why? (3 points) Circle your final answer. (6 points) d. Calculate a "cross-over" rate between Plan A and Plan B?

Explanation / Answer

a.

NPV of B = 85.05

2.

Use IRR function in Excel or trial and error

IRR = 20.45%

3. Choose A since it has a higher NPV

4. Take A as base, each cash flow = CF A - CF B

Use IRR function in Excel

IRR or crossover rate = 20.00%

Discount rate 6.0000% Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow                  (400.00) 0                                 (400.00)                             (400.00)                  250.000 1                                   235.85                             (164.15)                  280.000 2                                   249.20                                  85.05

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