Light Sweet Petroleum, Inc., is trying to evaluate a generation project with the

Question

Light Sweet Petroleum, Inc., is trying to evaluate a generation project with the following cash flows: Year Cash Flow 0 –$ 38,400,000 1 62,400,000 2 – 11,400,000 a-1 What is the NPV for the project if the company requires a return of 10 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $ 104,548,746 a-2 Should the firm accept this project? No Yes b. This project has two IRR's, 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.) (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

NPV = net present value. It is the sum of all present values.

Present value (PV) = cash flow/(1+rate of return)^t, where t is the year of cash flow.

PV of cash flow of year 0 = -38,400,000

PV of cash flow of year 1 = 62,400,000/(1.1)^1 = 56,727,272.73

PV of cash flow of year 3 = -11,400,000/(1.1)^2 = -9,421,487.60

NPV = -38,400,000+56,727,272.73-9,421,487.60 = $8,905,785.12

a2: The project should be accepted as the NPV is positive.

b. IRR is the rate that will make the NPV as nil.

It has to be calculated using a trial and error approach.

Thus IRR = 0.4152 or 41.52%

Year Cash flow Discount rate PV 0 -38,400,000.00 0.42 -38,400,000.00 1 62,400,000.00 44,091,830.00 2 -11,400,000.00 -5,691,830.00 NPV 0.00

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