Question

Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:

Year Cash Flow
0 –$ 1,275,000
1 435,000
2 505,000
3 415,000
4 345,000
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 4 percent.

If Anderson uses a required return of 11 percent on this project, what are the NPV and IRR of the project? (A negative answer 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.)

Answer 1

NPV = -$26,561.67

IRR = 10.29%

Step-by-step explanation:

Year Cash Flow Cash Flow W/ 4%

0 -$1,275,000 -$1,275,000 ----------> -$1,275,000

X $0 $0 ------------------> $0

1 $435,000 =$435,000*(1.04) --> $452,400.00

2 $505,000 =$505,000*(1.04) --> $525,200.00

3 $415,000 =$415,000*(1.04) --> $431,600.00

4 $345,000 =$345,000*(1.04) --> $358,800.00

***********USE EXCEL TO SOLVE FORMALLY FOR THE NPV AND IRR**********

=NPV(11%,0:358800)+-1,275,000

NPV = -$26,561.67

=IRR(-1275000:358800)

IRR = 10.29%

Answer 2

The IRR for this project is 13.18 %

Internal Rate of Return (IRR) is the discount rate that makes the Net Present Value (NPV) of future cashflow equal to zero. Compared to other projects IRR, a higher IRR shows a profitable project.

See calculations in Images below

The NPV for this project is $57,468

Net Present Value(NPV) is the value today of future cash flows discounted by the cost of capital. In this case we discount it using the required return of 11 percent.

See calculations in image below