ight Sweet Petroleum, Inc., is trying to evaluate a generation project with the
ID: 2772073 • Letter: I
Question
ight Sweet Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:
What is the NPV for the project if the company requires a return of 12 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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.)
ight Sweet Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:
Explanation / Answer
Answer
NPV = 7,141,071.43
Should the firm accept the project ? Answer –Yes
As the Net Present Value is positive
Working
Given
Cash Flow
Year 0 = -39,600,000
Year 1 = 63,600,000
Year 2 = -12,600,000
Required rate of return = 12% or 0.12
Net Present Value = - 39,600,000 + 63,600,000 / 1.12 – 12,600,000/1.12^2
= - 39,600,000 +56,785,714.29 – 12,600,000/1.2544
= -39,600,00 + 56,785,714.29 – 10,044,642.86
= 7,141,071.43
Answer (b)
IRR = 37.46%
Let r be the internal rate of return for the project
Internal Rate of Return can be calculated using the formula for NPV assuming that NPV is Zero.
Formula for calculating NPV
Net Present Value = - 39,600,000 + 63,600,000 / 1+r – 12,600,000/1+r^2
If NPV = 0, then
0 = - 39,600,000 + 63,600,000 / 1+r – 12,600,000/1+r^2
Solving this for r using algebraic methods it reduces to
r =(1423^-1/2 -13)/66
which gives 37.459% approximately
Alternately we can use IRR function in Excel to arrive at the value of r which gives a value of 37.459%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.