Anderson International Limited is evaluating a project in Erewhon. The project w
ID: 2789323 • 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 3 percent.
If Anderson uses a required return of 13 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
Find the future value of the cash flows for one year in which they are blocked.
Year 2 cashflow = 475000*1.03 = 489250
Year 3 cashflow = 540000*1.03 = 556200
Year 4 cashflow = 435000*1.03 = 448050
Year 5 cashflow = 390000*1.03 = 401700
NPV of the project:
NPV = -1300000 + 489250/(1+0.13)^2 + 556200/(1+0.13)^3 + 448050/(1+0.13)^4 + 401700/(1+0.13)^5 = -38546.86
NPV = -$38546.86
IRR is the rate at which NPV = 0
NPV = -1300000 + 489250/(1+IRR)^2 + 556200/(1+IRR)^3 + 448050/(1+IRR)^4 + 401700/(1+IRR)^5 = 0
By trail and error, IRR = 11.96%