Problem 9-28 NPV and IRR [LO1, 5] Anderson International Limited is evaluating a

Question

Problem 9-28 NPV and IRR [LO1, 5] Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows YearCash Flow 0 -$1,320,000 495,000 560,000 455,000 410,000 2 4 All cash flows will occur in Erewhon and are expressed in dollars. In an attempt to improve its economy, the Erewhonian government has declared that all cash flows created by a foreign company are "blocked" and must be reinvested with the government for one year. The reinvestment rate for these funds is 3 percent If Anderson uses a required return of 14 percent on this project, what are the NPV and IRR of the project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Enter your IRR as a percent.) NPV

Explanation / Answer

NPV=-1320000+495000/1.14+560000/1.14^2+455000/1.14^3+410000/1.14^4

=$94977.3

IRR Using reinvestment method

All cash flows except first are compounded to end of project & then IRR is calculated

IRR is the rate at which NPV=0

NPV=-1320000+(495000*1.03^3+560000*1.03^2+455000*1.03+410000)/(1+r)^4

Hence, 0=-1320000+(495000*1.03^3+560000*1.03^2+455000*1.03+410000)/(1+r)^4

r=11.13%

IRR=11.13%

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