NPV profiles: timing differences An oil drilling company must choose between two
ID: 2770069 • Letter: N
Question
NPV profiles: timing differences
An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $13 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $15.6 million. Under Plan B, cash flows would be $2.31 million per year for 20 years. The firm's WACC is 11.2%. 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 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
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
Year
Plan A
Plan B
dis factor @11.2%
Discounted cash flow (plan A)
Discounted cash flow (plan B)
0
-13
-13
1
-13
-13
1
15.6
0.90
14.02877698
1 to 20
2.31
7.86
18.1566
NPV
1.028776978
5.1566
Year
Plan A
0
-13
IRR
IRR(G10:G11)
20%
1
15.6
Year
Plan B
0
-13
1
2.31
2
2.31
3
2.31
IRR
IRR(G14:G34)
17%
4
2.31
5
2.31
6
2.31
7
2.31
8
2.31
9
2.31
10
2.31
11
2.31
12
2.31
13
2.31
14
2.31
15
2.31
16
2.31
17
2.31
18
2.31
19
2.31
20
2.31
Year
Plan A
Plan B
dis factor @11.2%
Discounted cash flow (plan A)
Discounted cash flow (plan B)
0
-13
-13
1
-13
-13
1
15.6
0.90
14.02877698
1 to 20
2.31
7.86
18.1566
NPV
1.028776978
5.1566
Year
Plan A
0
-13
IRR
IRR(G10:G11)
20%
1
15.6
Year
Plan B
0
-13
1
2.31
2
2.31
3
2.31
IRR
IRR(G14:G34)
17%
4
2.31
5
2.31
6
2.31
7
2.31
8
2.31
9
2.31
10
2.31
11
2.31
12
2.31
13
2.31
14
2.31
15
2.31
16
2.31
17
2.31
18
2.31
19
2.31
20
2.31
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