NPV profiles: timing differences An oil drilling company must choose between two
ID: 2774643 • Letter: N
Question
NPV profiles: timing differences An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $12 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $14.4 million. Under Plan B, cash flows would be $2.1323 million per year for 20 years. The firm's WACC is 11.5%. 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.
a.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.
b.Identify each project's IRR. Round your answers to two decimal places.
Project A %
Project B %
c.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 $ millionb.Identify each project's IRR. Round your answers to two decimal places.
Project A %
Project B %
c.Find the crossover rate. Round your answer to two decimal places.
Explanation / Answer
a)
2) IRR is when npv is 0.
From part 1 NPV is 0 for project A at 20 % and at 17 % for project A
3) Cross over rate is the rate at which value of both project is same.
20% =(1+ discount rate)^corresponding period =cashflow/discount factor Year Plan A cashflows Plan B cashflows Discounting factor Discounted cash flow A Discounted cash flow B 0 -12 -12 1 -12 -12 Discount Rate NPV Plan A NPV Plan B 1 14.4 2.1323 1.2 12 1.776916667 0% 2.40 30.65 2 0 2.1323 1.44 0 1.480763889 5 1.71 14.57 3 0 2.1323 1.728 0 1.233969907 10 1.09 6.15 4 0 2.1323 2.0736 0 1.028308256 12 0.86 3.93 5 0 2.1323 2.48832 0 0.856923547 15 0.52 1.35 6 0 2.1323 2.985984 0 0.714102956 17 0.31 0.00 7 0 2.1323 3.583181 0 0.595085796 20 0.00 -1.62 8 0 2.1323 4.299817 0 0.49590483 9 0 2.1323 5.15978 0 0.413254025 10 0 2.1323 6.191736 0 0.344378354 11 0 2.1323 7.430084 0 0.286981962 12 0 2.1323 8.9161 0 0.239151635 13 0 2.1323 10.69932 0 0.199293029 14 0 2.1323 12.83918 0 0.166077524 15 0 2.1323 15.40702 0 0.138397937 16 0 2.1323 18.48843 0 0.115331614 17 0 2.1323 22.18611 0 0.096109678 18 0 2.1323 26.62333 0 0.080091399 19 0 2.1323 31.948 0 0.066742832 20 0 2.1323 38.3376 0 0.055619027Related Questions
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