An oil drilling company must choose between two mutually


An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $11.8 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $14.16 million. Under Plan B, cash flows would be $2.0967 million per year for 20 years. The firm's WACC is 12.5%. 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. 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 $ 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. % b. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12.5%? -Select-yes no If all available projects with returns greater than 12.5% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.5%, because all the company can do with these cash flows is to replace money that has a cost of 12.5%? -Select-yes no Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows? -Select-yes no

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Financial Management: An oil drilling company must choose between two mutually
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