Howell Petroleum, Inc., is trying to evaluate a generation project with the foll

Question

Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows: Year Cash Flow 0 –$43,000,000 1 67,500,000 2 –18,000,000

Required:

(a) If the company requires a 11 percent return on its investments, what is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) NPV $ 3,201,607.01

(b) Compute the IRRs for this project. (Do not round intermediate calculations. Enter the positive value in the first answer box, and the negative value in the second answer box. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) Internal rate of return 22.93 % Internal rate of return %

Explanation / Answer

a.

b. IRR is that rate at which PV of cash outflows = PV of cash inflows

i.e. 43000000 = 67500000/(1+r) - 18000000/(1+r)^2

Solving for r we get, r = 22.92% approx

IRR = 22.92% approx.

Year Cash Flows PV Factor @ 11% Present Value 0 -43000000 1 -43000000 1 67500000 0.9009 60810810.81 2 -18000000 0.8116 -14609203.80 NPV 3201607.01

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