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: Cash Flow O $48,000,000 71,000,000 213000,000 Year 0 a-1. What is the NPV for the project if the company requires a 12 percent return? (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? O Yes O No b.This project has two IRR's, namely ent andp percent, in order percent and 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

a-1 Calculation of NPV

Net Present Value = PV of Inflows - PV of Outflows

= -48,000,000+63,392,857.14,-10,363,520.41

= 50,29,336.73

a-2 YES

Since the NPV is positive the project is acceptable.

b. Calculation of IRR

IRR is the rate at which NPV= 0, which is computed using trial and error method.

First let's find out NPV at say 26%

NPV = -48,000,000+56,349,206.35-8,188,460.57

= 160,745.78

Since the NPV is positive take a higher rate, say 27%

NPV = -48,000,000+55,905,511.81-8,060,016.12

= -154,504.31

IRR = R1 + ((NPV1 * (R2 - R1)) / (NPV1 - NPV2))

where

R1 - Rate with higher NPV = 26%

R2 - Rate with lower NPV = 27%

NPV1 - higher NPV = 160,745.78

NPV2 - lower NPV = -154,504.31

IRR = 26 + ((160745.78 (27-26)) / (160745.78 +154504.31))

= 26 + (160745.78/315250.09)

= 26+..51

=26.51%

*PVF calculated using the formula  1/(1+i)^n

Year Cashflow PVF@12% Cashflow*PVF 0     (48,000,000) 1.0000 -48,000,000.00 1        71,000,000 0.8929 63,392,857.14 2     (13,000,000) 0.7972 -10,363,520.41

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