Anderson International Limited is evaluating a project in Erewhon. The project w
ID: 2769345 • Letter: A
Question
Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows: Year Cash Flow 0 –$ 1,160,000 1 335,000 2 400,000 3 295,000 4 250,000 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 7 percent on this project, what are the NPV and IRR of the project?
Explanation / Answer
Year Cash flow reinvested with the government for one year @ 4% so future value =Cash flow *1.04 Cash flow after investment period -1160000 Future value Year 0 1 1 335000 1.04 348400 2 2 400000 1.04 416000 3 3 295000 1.04 306800 4 4 250000 1.04 260000 5 PV Of Cash flow @7% PV Year 0 -1160000 1 -1160000 1 0 0.9346 0 2 348400 0.8734 304306.05 3 416000 0.8163 339579.92 4 306800 0.7629 234056.25 5 260000 0.7130 185376.41 IRR Using Execl IRR Funtion 4.21% NPV -96681.37