Anderson International Limited is evaluating a project in Erewhon. The project w

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 9 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.)

Explanation / Answer

1.First of all we need to calculate future value of all cash flows at for one year in which goverment has block their fund.

NPV of this project =-$1200,000+$390,00/(1.09)^2 +$457,600/(1.09)^3+$348,400/(1.09)^4+$301,600/(1.09)^5

NPV =($75,559)

2. IRR of thos project

At IRR NPV = 0

0=-$1200,000+0+$390,00/(1+IRR)^2 +$457,600/(1+IRR)^3+$348,400/((1+IRR)^4+$301,600/((1+IRR)^5

Using a Spreadsheet or by trial and error method we can find IRR = 6.86%

Year Cashflow$ 2 $375000(1.04)      390,000 3 $440000(1.04)      457,600 4 $335000(1.04)      348,400 5 $290000(1.04)      301,600

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