Howell Petroleum, Inc., is trying to evaluate a generation project with the foll
ID: 2715620 • Letter: H
Question
Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:
If the company requires a 9 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).)
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).)
Year Cash Flow 0 –$41,500,000 1 64,500,000 2 –16,500,000Explanation / Answer
a. NPV of the project
PV of cash flows
Year 0 = -$41500000*1 = -$41500000
Year 1 = $64500000*0.917431192 = $59174311.88
Year 2 = -$16500000*0.841679992 = -$13887719.86
Therefore, NPV of project = $3786592.02
b.
Discounting at the rate of 15%
Year 0 = -$41500000*1 = -$41500000
Year 1 = $64500000*0.869565217 = $56086956.49
Year 2 = -$16500000*0.756143666 = -$12476370.48
Therefore NPV at discounting rate of 15% = $2110586.01
Now, when we increased discounting rate by 6% NPV reduced by $1676006.01
Therefore, to decrease NPV by $3786592.02 discounting rate = ($3786592.02*6%)/$1676006.01 = 13.55577%
Therefore Approx IRR = 9+13.55577 = 22.55577% or 22.56%
When we discount at these rate NPV = $142629.1
Discounting at 23% NPV = $32817.77
Increasing Discounting rate by 0.44% reduces NPV by $109811.33 ($142629.1-$32817.77) therefore reducing NPV by $142629.1 discounting rate to be increased by= $142629.1*0.44/$109811.33 = 0.57149662%
Therefore IRR = 22.56+0.57 = 23.13%
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