Alpha and Beta are separate ﬁrms that are both considering an oil exploration project. Alpha currently operates an oil reﬁning and distribution network and has an after-tax cost of capital of 12
Percent. Beta owns oil ﬁelds and concentrates on oil production. Beta's after-tax cost of capital is 15
Percent. The project under consideration has initial costs of $150,000 and anticipated annual cash
Inﬂows of $32,000 a year for ten years. Which ﬁrm(s) should accept this project, if any?

Question

Quizplus · Accepted Answer

To determine if the project is worth taking on, we need to calculate the net present value (NPV) of the project for each firm.

For Alpha: 
Using a discount rate of 12%, the NPV of the project is:
NPV = -$150,000 + ($32,000 / 0.12) * (1 - 1 / (1 + 0.12)^10)
NPV = $45,138.21

For Beta:
Using a discount rate of 15%, the NPV of the project is:
NPV = -$150,000 + ($32,000 / 0.15) * (1 - 1 / (1 + 0.15)^10)
NPV = $17,526.93

Since both firms have a positive NPV, it is in their best interest to accept the project. Therefore, the answer is C) Both Alpha and Beta.

Alpha and Beta Are Separate ﬁRms That Are Both Considering