Question

The Ewert Exploration Company is considering two mutually exclusive plans for extracting oil on property for which it has mineral rights. Both plans call for the expenditure of $11 million to drill development wells. Under Plan A, all the oil will be extracted in 1 year, producing a cash flow at t = 1 of $11.5 million; under Plan B, cash flows will be $1.5 million per year for 20 years. What are the annual incremental cash flows that will be available to Ewert Exploration if it undertakes Plan B rather than Plan A? (Hint: Subtract Plan A's flows from B's.)

Answer 1

Answer:

The incremental cash flow is $18,500,000

Explanation:

In the attached excel in I laid the cash flows for each of the two projects side by side for relevant years,thereafter I calculated incremental cash by deducting project's A  cash flows from B's.

Finally I summed up the total incremental cash flows to give $18.5 million at the end of year 20.

Download xlsx