Howel Petroleum, Inc,strying to evaluate a gererann pyect wenefolosing for 62,50

ID: 2794985 • Letter: H

Question

Howel Petroleum, Inc,strying to evaluate a gererann pyect wenefolosing for 62,500,000 16 800.000 . If the company requires a return of 11 percent on its investments, what is the NPV of the project7 (De not round intermediats calculations and round your answer to 2 decimal placssg.32.1 b. Compute the IRRs for this project. (Do not round intermediate calculations and enter your anewers as a percent rounded to 2 decimal places,32.16 Enter the ager IRR in the first answer bx and the smaller IRR in the second answer box. if you can only caleulate one I, enter it in both boxes to receive partial eredit A negative answer should have a minus sigsj internal rate of retum Internal rate of retun

Explanation / Answer

Year

Cash flow

Formula for PV Factor

PV Factor %

$ -40,500,000

1/(1+0.11)^0

$ -40,500,000.0

$ 62,500,000

1/(1+0.11)^1

0.900900901

$ 56,306,306.3

$ -15,500,000

1/(1+0.11)^2

0.811622433

$ -12,580,147.7

NPV

$ 3,226,158.6

NPV is $ 3,226,158.6

b.To calculate IRR we have to find out discount rate at 0 NPV .

-$ 40,500,000 + $ 62,500,000/(1+r) - $15,500,000/(1+r)2 = 0

Let , 1+r = X

$ 62,500,000/X -$ 15,500,000/X2 - $40,500,000 = 0

$ 62,500 X - $ 15,500 -$ 40,500 X2 = 0

$ 40,500 X2 - $ 62,500 X + $ 15,500 = 0

a = 40,500 b = -62,500 c = 15,500

X = [-b ±(b2 – 4ac)1/2]/2a

= 62,500 ± (3,906,250,000– 4 x 40,500 x 15,500)]/2x40,500

= [62,500 ± (3,906,250,000 – 2,511,000,000)1/2]/81,000

= [(62,500 ± (1,395,250,000)1/2]/81,000

= 62,500 ± 37353.04539/81,000

X = (62,500 + 37,353.04539)/81,000 = 99,853.04539/81,000 =1.232753647

X = (62,500 – 37,350.0439)/81,000 = 25146.95461/81,000 = 0.31045623

r= 1.232753647 – 1 = 0.232753647 or 23.28 %

r = 0.31045623 – 1 = -0.68954377 or – 68.95 %

IRR is 23.28 %

IRR is -68.95 %