Anderson International Limited is evaluating a project in Erewhon. The project w
ID: 2444983 • Letter: A
Question
Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:
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 7 percent. Assume Anderson uses a required return of 13 percent on this project.
What is the NPV of the project? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).)
What is the IRR of the project? (D
Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:
Explanation / Answer
Calculation of NPV of the project:
From the given Information, Cash outflow (Investment) = $ 582,000 in the beginning.
year Revised cash Inflows PVF @ 13 % Present value
1 0 0.884 0
2 226,840 (212000+ 7%) 0.783 177615.70
3 165,850 (155000+7%) 0.693 114934.10
4 235,400 (220000+7%) 0.613 144300.20
5 212,930 (199000+7%) 0.542 115408.10
552258.10
NPV of the project @ 13 % = Present values of Cash Inflow - Cash outflow
= 552,258.10 - 582,000
= - 29,741.90
= - 29,742 (which is Negative)
Similar way, NPV of the project @10% = Present values of Cash inflow- cash outflow
= 604,718 - 582,000
= 22,717.99
= 22718 (Which is Positive )
Now, IRR of the Project = L1 + {[NPV @L1] / [NPV@L1- NPV @L2]} * [L2-L1]
= 10 + 22718/ [22718- (-29742)] * [13-10] { Please see foot note for clarification}
= 10 + [22718/52460] * 3
= 10+ 1.299
= 11.299
= 11.3%
Therefore NPV of the project @ 13% rate of return = $ -29,742
and IRR of the project = 11.3%
Note: 1. While Calculating NPV @ 13%, Revised cash flows are taken to mean Cash Inflows after 1 year of
investment, Where 7% interest rate is added.
2. Present value of cash flows @ 10% are calculated using Present value faactor @10% multiplied by
Revised cash flows. { Calculated for the purpose of IRR}
3. In the IRR formula, L1 is First guess rate, where NPV is Positive and
L2 is second guess rate, where NPV is Negative.