NPV and IRR: Unequal Annual Net Cash Inflows Assume that Goodrich Petroleum Corp

Question

NPV and IRR: Unequal Annual Net Cash Inflows Assume that Goodrich Petroleum Corporation is evaluating a capital expenditure proposal that has the following predicted cash flows: Initial Investment $(45,880) Operation 15,000 Year 1 Year 2 Year 3 25,000 Salvage a. Using a discount rate of 10 percent, determine the net present value of the investment proposal. $ 0 b. Determine the proposal's internal rate of return. (Refer to Appendix 128 if you use the table approach.) Round to the nearest percent. (Example: 0.15268 = 15%) 0% Check

Explanation / Answer

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=15000/1.1+25000/1.1^2+20,000/1.1^3

=$49323.82(Approx)

NPV=Present value of inflows-Present value of outflows

=$49323.82-$45880

=$3443.82(Approx).[Please note that intermediate calculations have not been rounded off].

2.

Let irr be x%
At irr,present value of inflows=present value of outflows.

45880=15000/1.0x+25000/1.0x^2+20,000/1.0x^3

Hence x=IRR=14%(APPROX).

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