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

Question

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

Year Cash Flow
0 –$ 39,200,000
1 63,200,000
2 – 12,200,000  

a-1

What is the NPV for the project if the company requires a return of 11 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  NPV $  

a-2 Should the firm accept this project?

Yes
No

b.

This project has two IRRs, namely percent and percent, in order from smallest to largest. (Note: If you can only compute one IRR value, you should input that amount into both answer boxes in order to obtain some credit.) (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Discount Rate=11%

(a1) NPV of the project=-39200000+63200000/(1.11)-12200000/(1.11^2)=7,835,143.

(a2) Yes, the Project should be accepted as the NPV is Positive.

(b) For calculation of IRR, the following equation should be true

39200000=63200000/(IRR)-12200000/(IRR^2)

By trial and error , we get IRR=38.8%

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