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: Year Cash Flow $37,000,000 55,500,000 -12,000,000 a. If the company requires a return of 8 percent on its investments, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places e.9.,32.16.) NPV b. Compute the IRRs for this project. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. Enter the larger IRR in the first answer box and the smaller IRR in the second answer box. If you can only calculate one IRR, enter it in both boxes to receive partial credit. A negative answer should have a minus sign.) Internal rate of return Internal rate of return

Explanation / Answer

r=8%

NPV=CF0+CF1/(1+r)+CF2/(1+r)^2=-37000000+55500000/(1.08)-12000000/(1.08)^2=4100823

IRR is the rate at which NPV=0

NPV=-37000000+55500000/(1+r)-12000000/(1+r)^2

0=-37000000+55500000/(1+r)-12000000/(1+r)^2

=>-37(1+r)^2+55.5*(1+r)-12=0

=>-37-37r^2-74r+55.5+55.5r-12=0

=>-37r^2-18.5r+6.5=0

=>37r^2+18.5r-6.5=0

Solving the quadratic equation we get,

r=0.238 and r=-0.738

Hence, IRR=23.8% and -73.8%

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