Howell Petroleum, Inc., is trying to evaluate a generation project with the foll
ID: 2627653 • Letter: H
Question
Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:
If the company requires a 12 percent return on its investments, what is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).
Compute the IRRs for this project. (Do not round intermediate calculations. Enter the positive value in the first answer box, and the negative value in the second answer box. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Year Cash Flow 0 $38,500,000 1 58,500,000 2 13,500,000 Required: (a)If the company requires a 12 percent return on its investments, what is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).
(b)Compute the IRRs for this project. (Do not round intermediate calculations. Enter the positive value in the first answer box, and the negative value in the second answer box. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Solution: Figure in $ (a) Present value of cash outflow = 38500000 Present value of cash INflow year Inflows PVF @ 12%` PV 1 58500000 0.892857143 52232142.9 2 -13500000 0.797193878 -10762117.3 Total 41470025.5 NPV = PVCI - PVCO = 41470025.5 - 38500000 = 2970025.51 So NPV is $2970025.51 (b) Calculation of IRR: Using trial & error and interpolation. year Inflows PVF @ 23% PV PVF @ 24% PV 1 58500000 0.81300813 47560975.6 0.806451613 47177419.35 2 -13500000 0.66098222 -8923259.96 0.650364204 -8779916.75 Total 38637715.6 Total 38397502.6 IRR = [LR + {(PV at LR - Required PV)/(PV at LR - PV at HR)} * (HR - LR) ] Here LR = LOWER RATE = 23% Here HR = HIGHER RATE = 24% IRR = [23 + {(38637715.6 - 38500000)/(38637715.6 - 38397502.6)} * (24 - 23) ] = 23% + 0.5733% = 23.57%
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