contestada

An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $12.4 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $14.88 million. Under Plan B, cash flows would be $2.2034 million per year for 20 years. The firm's WACC is 12.3%.

Respuesta :

ahmedgodtrust

Answer:

                     PLAN A

Year Cashflow DF@12.3           PV

             

Otras preguntas

m                $

0          (12.4)         1          (12.4)

1           14.88      0.8905          13.25

          NPV                 0.85

                   PLAN B

Year Cashflow DF@12.3    PV                              

                   

Otras preguntas

m                                

Otras preguntas

m

0          (12.4)          1    (12.4)

1-20  2.2034      7.3309  16.15

          NPV           3.75

Project B should be accepted

Explanation:

In this case, we need to discount the cash inflow of plan A at 12.3% for 1 year and then deduct the initial outlay from the present value of cash inflow. The discount factor could be derived from the present value table.

For plan B, we will discount the cash inflow at 12.3% for 20 years. In this case, we will use the annuity factor for 20 years.  Thereafter, we will multiply the cashflow by the annuity factor for 20 years to obtain the present value. The initial outlay will be deducted from the present value so as to obtain the net present value(NPV).

The annuity factor can be obtained from the present value of annuity table.

The project with the higher NPV will be accepted.

Otras preguntas

Which type of reaction releases the greatest amount of energy per mole of reactant?(1) combustion (2) decomposition (3) nuclear fusion (4) oxidation-reduction
MATCH THESE ^-^Match Newton's law with the correct statement. 1. law of universal gravitation 2. 1st law of motion (law of inertia) 3. 2nd law of motion 4. 3r
Which of the following was NOT an effect of the 1848 nationalist revolutions? Select the best answer from the choices provided. a.Rich classes reinforced their
A 75-kilogram hockey player is skating across the ice at a speed of 6.0 meters per second. What is the magnitude of the average force required to stop the playe
Here are 10 test scores: 30, 74, 76, 77, 78, 79, 80, 80, 82, 84. The mean of these scores is 74. Does this set have an outlier and, if so, how does removing it
there are 35 student in Mrs. Carl's class the school nurse select three students at random and measures their heights based on the sample the median height of s
A 4.0-kilogram object is accelerated at 3.0 meters per second2 north by an unbalanced force. The same unbalanced force acting on a 2.0-kilogram object will acce
A deuterium nucleus consists of one proton and one neutron. The quark composition of a deuterium nucleus is (1) 2 up quarks and 2 down quarks (2) 2 up quarks an
The Berlin Conference in 1884 was significant because it (1) promoted Belgium as a world power (2) established rules for the European division of
Pol Pot, the Khmer Rouge, the “killing fields,” and Year Zero are all associated with a violent period in which country? (1) Vietnam (3)