NPV profiles: timing differences (If possible please show how you got the answer

Question

NPV profiles: timing differences (If possible please show how you got the answer)

An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $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 11.4%.

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.

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 11.4%? yes or no


If all available projects with returns greater than 11.4% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 11.4%, because all the company can do with these cash flows is to replace money that has a cost of 11.4%?
yes or no

Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?
yes or no

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

Explanation / Answer

(All Figure are in Million)

At Discount Rate = 0%

NPV Plan A = -11.2 + 13.44

NPV Plan A = $ 2.24

NPV Plan B = -11.2 + 1.9901*PVIFA(0%,20)

NPV Plan B = - 11.2 + 1.9901*20

NPV Plan B = $ 28.60

At Discount Rate = 5%

NPV Plan A = -11.2 + 13.44/1.05

NPV Plan A = $ 1.60

NPV Plan B = -11.2 + 1.9901*PVIFA(5%,20)

NPV Plan B = - 11.2 + 1.9901*12.462210

NPV Plan B = $ 13.60

At Discount Rate = 10%

NPV Plan A = -11.2 + 13.44/1.10

NPV Plan A = $ 1.02

NPV Plan B = -11.2 + 1.9901*PVIFA(10%,20)

NPV Plan B = - 11.2 + 1.9901*8.513564

NPV Plan B = $ 5.74

At Discount Rate = 12%

NPV Plan A = -11.2 + 13.44/1.12

NPV Plan A = $ 0.80

NPV Plan B = -11.2 + 1.9901*PVIFA(12%,20)

NPV Plan B = - 11.2 + 1.9901*7.469444

NPV Plan B = $ 3.66

At Discount Rate = 15%

NPV Plan A = -11.2 + 13.44/1.15

NPV Plan A = $ 0.49

NPV Plan B = -11.2 + 1.9901*PVIFA(15%,20)

NPV Plan B = - 11.2 + 1.9901*6.259331

NPV Plan B = $ 1.26

At Discount Rate = 17%

NPV Plan A = -11.2 + 13.44/1.17

NPV Plan A = $ 0.29

NPV Plan B = -11.2 + 1.9901*PVIFA(17%,20)

NPV Plan B = - 11.2 + 1.9901*5.627767

NPV Plan B = $ 0.00

At Discount Rate = 20%

NPV Plan A = -11.2 + 13.44/1.20

NPV Plan A = $ 0

NPV Plan B = -11.2 + 1.9901*PVIFA(20%,20)

NPV Plan B = - 11.2 + 1.9901*4.869580

NPV Plan B = - $ 1.51

Identify each project's IRR. Round your answers to two decimal places.

IRR is the rate at which NPV is Zero

Project A

IRR = 20%

Project B

IRR = 17%

Find the crossover rate. Round your answer to two decimal places.

Using Excel Formula and IRR formula is used to calculate Cross Overrate

Crossover Rate = irr(differential Cash Flow in both plan)

Crossover Rate = irr({0,-11.4499,1.9901,1.9901,1.9901,1.9901,1.9901,1.9901,1.9901,1.9901,1.9901,1.9901, 1.9901, 1.9901,1.9901,1.9901,1.9901,1.9901,1.9901,1.9901,1.9901})

Crossover Rate = 16.41%

Working

Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 11.4%?

Yes


If all available projects with returns greater than 11.4% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 11.4%, because all the company can do with these cash flows is to replace money that has a cost of 11.4%?
Yes

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

Year Cash Flow in Plan A Cash Flow in Plan B Differential 0 -11.2 -11.2 0 1 13.44 1.9901 -11.4499 2 0 1.9901 1.9901 3 0 1.9901 1.9901 4 0 1.9901 1.9901 5 0 1.9901 1.9901 6 0 1.9901 1.9901 7 0 1.9901 1.9901 8 0 1.9901 1.9901 9 0 1.9901 1.9901 10 0 1.9901 1.9901 11 0 1.9901 1.9901 12 0 1.9901 1.9901 13 0 1.9901 1.9901 14 0 1.9901 1.9901 15 0 1.9901 1.9901 16 0 1.9901 1.9901 17 0 1.9901 1.9901 18 0 1.9901 1.9901 19 0 1.9901 1.9901 20 0 1.9901 1.9901

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.