Anderson International Limited is evaluating a project in Erewhon. The project w
ID: 2731304 • 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 6 percent. Assume Anderson uses a required return of 12 percent on this project. Requirement 1: 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).) Net present value $________Requirement 2: What is the IRR of the project? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Internal rate of return___________%Explanation / Answer
The cash flows since they are blocked by the givernment for 1 year are as follows
Year 2 cash flow = 211,000*(1.06) = 223,660
Year 3 cash flow = 154,000*(1.06) = 163,240
Year 4 cash flow = 219,000*(1.06) = 232,140
Year 5 cash flow = 198,000*(1.06) = 209,880
1. The NPV of the project is calculated as follows:
-581,000 + 223,660/1.12^2 + 163,240/1.12^3 + 232,140/1.12^4 + 209,880/1.12^5 = -19,887.89 (Negative)
The NPV = -19,887.89(Negative)
2. The IRR of the project is calculated as follows
The IRR of the project is 10.85%
Year Cash flow 0 -581000 1 0 2 223660 3 163240 4 232140 5 209880 IRR 10.85%