Answer to Question #13406 in Finance for narxoznik
a) What are the annual incremental cash flows that will be available to the firm if it undertakes Plan B rather than Plan A?
b) If the firm accepts Plan A, and then invests the extra cash generated at the end of year 1, what rate of return (reinvestment rate) would cause the cash flows from reinvestment to equal the cash flows of Plan B?
B) What is the Year 1 incremental cash of choosing oil-extraction method A over B? Next, what are the 19 incremental CFs in years 2 - 20 of choosing B over A? Note that these 19 B-over-A incremental CFs form a 19-year annuity in years 2 - 20. Finally, what discount rate causes that 19-year annuity to have a present value that's equal to the Year 1 A-over-B incremental CF? (Finding the correct discount rate is usually a trial-and-error exercise, unless you use a tool such as Excel, or a financial calculator.)
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