Howell Petroleum, Inc., is trying to evaluate a generation project with the foll

Question

Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:

If the company requires a 11 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).)

I know the first IRR is equal to 23.65%

Please show work. Thaks. Will rate.

Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:

Explanation / Answer

a) NPV = P.V. of cash inflow - P.V. of cash outflow

P.V. of Cash inflow:   = 57500000 * P.V. factor for first year @ 11 % + (-) 13000000 * P.V. factor for first year @ 11 %

= 57500000 * 0.9009 - 13000000 * 0.8116

   = 51801750 - 10550800

   = $ 41250950

P.V. of cash outflow = $ 3800000 (Year 0)

NPV of Project = 41250950 - 38000000 = $ 3250950

Conclusion:- The NPV of project = $ 3250950

b) IRR of project

Take two trial rate. One rate at which P.V. of cash inflow is more than the P.V. of cash outflow and vice-verca.

P.V. of cash outflow = $ 38000000 (Year 0)

At 20 %

P.V. of cash inflow = 57500000 * P.V. factor for first year @ 20 % + (-) 13000000 * P.V. factor for first year @ 20 %

= 57500000 * 0.8333 - 13000000 * 0.6944

= $ 38887550

At 24 %

P.V. of cash inflow = 57500000 * P.V. factor for first year @ 24 % + (-) 13000000 * P.V. factor for first year @ 24 %

= 57500000 * 0.8064 - 13000000 * 0.6504

= $ 37912800

IRR (By interpolation) = 20 + (24 - 20) * (38887550 - 38000000) / (38887550 - 37912800)

   = 20 + 4 * 887550 / 974750

= 20 + 3550200 / 974750

   = 20 + 3.65

   = 23.65 (approx)

Conclusion:- IRR of project = 23.65 %

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