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 –$36,000,000 1 53,500,000 2 –11,000,000 Required: (a) If the company requires a 12 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 $ 2998724.49 (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 23.96 % Internal rate of return %

Explanation / Answer

Solution : figures in $ [1] NPV = PVCI - PVCO Present value of cashoutflow (PVCO) = 36000000 Present value of cashintflow (PVCI) Year Cashflow PVF @ 12% PV 1 53500000 0.89285714 47767857.14 2 -11000000 0.79719388 -8769132.653 PVCI 38998724.49 So NPV = 38998724.49 - 36000000 = 2998724.49 [2] Calculation of IRR Using trial & error and interpolation. Year Cashflow PVF @ 23% PV PVF @ 24% PV 1 53500000 0.81300813 43495934.96 0.806451613 43145161.29 2 -11000000 0.66098222 -7270804.415 0.650364204 -7154006.243 PVCI 36225130.54 PVCI 35991155.05 IRR = [LR + {(PV at LR - Required PV)/(PV at LR - PV at HR)} * (HR - LR) ] Here LR = LOWER RATE = 23% Here HR = HIGHER RATE = 24% IRR = [23 + {(36225130.54 - 36000000 )/(36225130.54 - 35991155.05)} * (24 - 23) ] = 23 + 0.94 = 23.94% approx

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