Question: Petrobras is considering the following two projects: Project A involves purchasing a Suezmax size oil tanker to be used in South America, while Project B

Petrobras is considering the following two projects: Project A involves purchasing a Suezmax size oil tanker to be used in South America, while Project B involves purchasing a VLCC (very large crude carriers) tanker to be deployed to the Middle East. The estimated cash flows from the projects are as follows (in $ million):

Year	0	1	IRR	NPV (@10%)
Project A	-10	20
Project B	-20	35

1. Calculate the Internal Rate of Return (IRR) and Net Present Value (NPV) of projects A and B. Assume that the risk-adjusted discount rate is 10%.

2. Based on the IRR rule, which project is preferred? How about based on the NPV rule?

3. Petrobras experienced a severe problem financing its investment projects after the recent decline in oil price. Assuming that the firm had secured only $20m of capital to invest, which project should Petrobras choose? Why?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Exam 3 Q1. Adventure Outfitter Corp. can sell common stock for $27 per share and its investors require a 17% return. However, the administrative or flotation costs associated with selling the stock...

Q1. Adventure Outfitter Corp. can sell common stock for $27 per share and its investors require a 17% return. However, the administrative or flotation costs associated with selling the stock amount...

Question 1 Criticallyanalyzethe statement petroleum industry is also highly capital-intensive, so strong returns are critical to attracting low-cost debt and equity capital. In fact, while many of...

Pacific Drilling The Preferred Offshore Driller From June 2014 to January 2015, the market price of oil fell from US$115 per barrel down to $49 per barrel. As oil prices went down, so did the...

PRINTED BY: smj@staceymjohnson.com. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be...

336 Part III. Special Topics in Ethics products daily. Mobil had a net income of reputation was severely tarnished. After total petroleum product sales of 3.3 million Valdez, was renamed Sea River...

Read the case scenario and use the text provided to support your answer and only used the text provided Case Scenario Dion is an engineer with Tesla Motors who helps to design electric motors. It has...

Compute the weighted-average number of shares to be used in computing basic EPS for 2013. Because no beginning share figures are available, you must work backward from December 31, 2013, to compute...

The initial regression model given in this chapter was Price = 24,765 0.1725 (Mileage). a. Give a practical explanation of the coefficient, b1 = 0.1725, in the context of the Cars data. b. The...

5. Assume that the profession permits the savings and loan industry to defer losses on investments it sells, because immediate recognition of the loss may have adverse economic consequences on the...

P-1) (100 Pts.) A chemical manufacturing company (CMC) has a contract for the procurement of the neccssaly chemicals from four suppliers. The chemicals purchased from Supplier A are priced at $20...

Describe the criteria for selecting the style for a social business message.

Use appropriate alternatives to ensure unbiased language in messages.

Describe the appropriate use of supplementary parts of a letter.