NPV profiles: timing differences An oil drilling company must choose between two

Question

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 12.8%.

1. Construct NPV profiles for Plans A and B. Round your answers to two decimal places.

Discount RateNPV Plan ANPV Plan B

0%.$______million$______million

10%..$______million$______million

12%..$______million$______million

15%..$______million$______million

17%..$______million$______million

20%..$______million$______million

2. 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.

________%

Explanation / Answer

Discount Rate……………NPV Plan A…………………NPV Plan B

0%……………………….$2.2______million………………$28.1______million

10%.…………………….$1______million………………$5.64______million

12%….………………….$0.79______million………………$3.6______million

15%….………………….$0.48______million………………$1.23______million

17%….………………….$0.28______million………………$3.4 x 10-5______million

20%….………………….$0______million………………$-1.48______million

plan A IRR=20%

plan B IRR=17%

Cross over rate= 16.41%

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