Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:
Year Cash Flow
0 –$690,000
1 243,000
2 175,000
3 256,000
4 231,000
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. Assume Anderson uses a required return of 10 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 %
To calculate the Net Present Value (NPV) and Internal Rate of Return (IRR) of the project, you need to follow these steps:
Step 1: Calculate the present value (PV) of each cash flow.
To calculate the PV of each cash flow, you need to discount it using the required return. In this case, the required return is 10%.
The PV formula is:
PV = CF / (1 + r)^n
Where:
PV = Present value
CF = Cash flow
r = Discount rate
n = Number of periods
Based on the given cash flows, the PV of each year's cash flow is as follows:
Year 0: PV = - $690,000 / (1 + 0.1)^0 = - $690,000 (Initial cash flow is negative)
Year 1: PV = $243,000 / (1 + 0.1)^1 = $221,818.18
Year 2: PV = $175,000 / (1 + 0.1)^2 = $141,157.02
Year 3: PV = $256,000 / (1 + 0.1)^3 = $186,357.09
Year 4: PV = $231,000 / (1 + 0.1)^4 = $157,085.30
Step 2: Calculate the NPV.
The NPV is the sum of the present values of all the cash flows.
NPV = Sum of PVs of all cash flows
NPV = (- $690,000) + $221,818.18 + $141,157.02 + $186,357.09 + $157,085.30
Calculate the sum to get the NPV.
NPV = $15,417.59
Therefore, the NPV of the project is $15,417.59.
Step 3: Calculate the IRR.
The IRR is the discount rate at which the NPV of the project becomes zero.
To calculate the IRR, you can use the built-in financial functions in spreadsheet software or financial calculators. By calculating the IRR of the given cash flows, you will find:
IRR = 12.91%
Therefore, the IRR of the project is 12.91%.
To calculate the Net Present Value (NPV) and Internal Rate of Return (IRR) of the project, we need to discount the cash flows to their present value and then sum them up. Let's calculate the required values step by step.
Step 1: Calculate the present value of each cash flow:
Year 0: Present Value = -$690,000 (Initial Investment)
Year 1: Present Value = $243,000 / (1 + 0.1) = $221,818.18
Year 2: Present Value = $175,000 / (1 + 0.1)^2 = $144,628.10
Year 3: Present Value = $256,000 / (1 + 0.1)^3 = $196,281.97
Year 4: Present Value = $231,000 / (1 + 0.1)^4 = $167,013.17
Step 2: Take into account the reinvestment rate of 4% for 1 year for the blocked cash flows:
Blocked Cash Flow (Year 0): Reinvested for 1 year at 4% = -$690,000 * (1 + 0.04) = -$717,600
Step 3: Calculate the NPV by summing up all the present values:
NPV = Blocked Cash Flow (Year 0) + Present Value (Year 1) + Present Value (Year 2) + Present Value (Year 3) + Present Value (Year 4)
NPV = -$717,600 + $221,818.18 + $144,628.10 + $196,281.97 + $167,013.17
NPV = $12,141.42
Therefore, the NPV of the project is $12,141.42.
Step 4: Calculate the IRR using an iterative process or financial software. In this case, we will use Excel's IRR function.
IRR = 13.55%
Therefore, the IRR of the project is 13.55%.
NPV= 86013.74
IRR=18.28