Anderson International Limited is evaluating a project in Erewhon. The project w
ID: 2728843 • 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 4 percent.
If Anderson uses a required return of 10 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.)
Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:
Explanation / Answer
Future Value of the Cash flows for the one year which the government as blocked.
Reinvesting each cash inflow for one year.
Step:1
Step:2
NPV Project:
NPV = {Net Period Cash Flow/(1+R)^T} - Initial Investment
where R is the rate of return and T is the number of time periods
NPV = -$1,230,000 + $421,200/1.102 + $488,800/1.103 + $379,600/1.104 + $332,800/1.105
NPV = -48743.6
Step:3
IRR Project:
IRR is calculated using the NPV formula by solving for R if the NPV equals zero
IRR = -$1,230,000 + $421,200/(1+IRR)2 + $488,800/(1+IRR)3 + $379,600/(1+IRR)4 + $332,800/(1+IRR)5
IRR = 12.70%
Years Cash Flow 2nd year cashflow $405,000 x 1.04 421,200 3rd year cashflow $470,000 x 1.04 488,800 4th year cashflow $365,000 x 1.04 379,600 5th year cashflow $320,000 x 1.04 332,800