Anderson International Limited is evaluating a project in Erewhon. The project w
ID: 2777511 • 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 5 percent. Assume Anderson uses a required return of 11 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? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:
Explanation / Answer
we need to find the future value of the cash flows for the one year in which they are blocked by thegovernment. So, reinvesting each cash inflow for one year, we find
Year Cash Flow future value of the cash flows(Cash Flow*(1.05) PV factor 11%^ Present Value 0 –$576,000 –$576,000 1.00000 -576000.0 1 206,000 216300 0.81162 175553.9 2 149,000 156450 0.73119 114394.9 3 214,000 224700 0.65873 148016.8 4 1,93,000 202650 0.59345 120262.9 Net present Value -17771.4