Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows: Year Cash Flow 0 –$591,000 1 221,000 2 164,000 3 229,000 4 208,000 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 12 percent on this project. a. What is the NPV of the project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the IRR of the project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
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Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows: |
| Year | Cash Flow |
| 0 | –$591,000 |
| 1 | 221,000 |
| 2 | 164,000 |
| 3 | 229,000 |
| 4 | 208,000 |
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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 12 percent on this project. |
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| a. | What is the NPV of the project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| b. | What is the IRR of the project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
Net present value (NPV) is used to determine the present value of all future cash flows. Net present value can be referred to as the difference of all cash outflows and inflows discounted to present value. Net present value can be determined by using the formula for the same or by using the excel NPV function. In order to compute NPV, initial cash outflow is required, cash inflow for a specified period, and the discount rate.
Internal rate of return (IRR) is a metric used by corporations to determine the rate of return on investment or a project. The IRR methodology does not take into account external factors such as the inflation rate, risk-free rate, financial risk, etc. Thus, due to the non-consideration of such factors, this method of financial analysis is called an internal rate of return. IRR is the discounting rate that makes NPV equal to zero.
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