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 $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.

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.
%

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

Discount rate 0% 5% 10% 12% 15% 17% 20%

for 1 year 1 0.952 0.909 0.893 0.870 0.855 0.833

For 20 years 1 12.462 8.514 7.469 6.260 5.630 4.870

for Plan A NPV = (Cash inflow x Discount factore for 1 year)

NPV (A) 15.6 14.85 14.18 13.93 13.57 13.34 12.99

for Plan B NPV = (Cash flow x Discount factor of 20 years )

NPV (B) 46.2 28.78 19.66 17.25 14.46 13.01 11.25

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