Problem 11-15 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 12.6%.

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.

Discount Rate	NPV Plan A	NPV Plan B
0%	$ {C} million	$ {C} million
5	$ {C} million	$ {C} million
10	$ {C} million	$ {C} million
12	$ {C} million	$ {C} million
15	$ {C} million	$ {C} million
17	$ {C} million	$ {C} million
20	$ {C} million	$ {C} million

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.

%

Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12.6%? -Select-yesnoItem 18 If all available projects with returns greater than 12.6% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.6%, because all the company can do with these cash flows is to replace money that has a cost of 12.6%? -Select-yesnoItem 19 Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows? -Select-yesnoItem 20

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