NPV PROFILES: TIMING DIFFERENCES An oil-drilling company must choose between two
ID: 2791328 • Letter: N
Question
NPV PROFILES: TIMING DIFFERENCES An oil-drilling company must choose between two mutually exclusive extraction projects, and each costs $12.2 million. Under Plan A all the oil would be extracted in 1 year, producing a cash flow at t-1 of$14.64 million. Under plan B, cash flows would be $2.1678 million per year for 20 years. The firm's WACC is 11.7% a. Construct NPV profiles for Plans A and B. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. If an year, producinga of $14.64 mil amount is zero enter "O". Negative value should be indicated by a minus sign NPV PlanA NPV Plan B Identify each project's IRR. Round your answers to two decimal places. Do not round your intermediate calculations Project A Project B Find the crossover rate. Round your answer to two decimal places. Do not round your intermediate calculations. calculationsExplanation / Answer
Computation of NPV for 2 alternatives
IRR is the rate at which NPV is zero
Project A = 20%
Project B = 17%
Plan A Details Amount Year/Disc rates 0% DCF 5% DCF 10% DCF 12% DCF 15% DCF 17% DCF 20% DCF Inflows 14.64 1 1.000 14.64 0.9524 13.9429 0.9091 13.3091 0.8929 13.0714 0.8696 12.7304 0.8547 12.5128 0.8333 12.2000 Outflows 12.2 0 1.000 12.2000 1.0000 12.2000 1.0000 12.2000 1.0000 12.2000 1.0000 12.2000 1.0000 12.2000 1.0000 12.2000 NPV 2.44 1.74 1.11 0.87 0.53 0.31 0.00 Plan B Details Year/Disc rates 0% DCF 5% DCF 10% DCF 12% DCF 15% DCF 17% DCF 20% DCF Inflows(annuity) 2.1678 1 to 20 yrs 20.0000 43.3560 12.4622 27.0156 8.5136 18.4558 7.4694 16.1922 6.2593 13.5689 5.6278 12.1999 4.8696 10.5563 Outflows 12.2 0 1.0000 12.2000 1.0000 12.2000 1.0000 12.2000 1.0000 12.2000 1.0000 12.2000 1.0000 12.2000 1.0000 12.2000 NPV 31.156 14.8156 6.25578 3.99217 1.36891 0.00 -1.6437Related Questions
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