Anadarko Petroleum must choose between two mutually exclusive oil-drilling proje

Question

Anadarko Petroleum must choose between two mutually exclusive oil-drilling projects, which each have a cost of $12 million. Under Plan A, all oil would be extracted in one year, producing a cash flow at t 1 of $14.6 million Unde Plan B, cash flows would be $2.1 million for 20 years The firm's WACC is 12%. At what rate are the NPVs for these two plans the same? That is, what is the crossover rate where the two projects' NPVs are equal? Your answer should be between 12.25 and 17 15.rounde to 2 decimal places, with no special characters

Explanation / Answer

Cross over IRR:

14/(1+IRR)=2.1/(1+IRR)+2.1/(1+IRR)^2+...2.1/(1+IRR)^20

=>-11.9/(1+IRR)+2.1/(1+IRR)^2.............2.1/(1+IRR)^20=0

=>-11.9/(1+IRR)+2.1/(IRR*(1+IRR))*(1-1/(1+IRR)^19)=0

=>IRR=16.7104%

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