Question

ANACOND is a construction company that is
thought of creating a new residential block. Noted that
the initial investment to buy land and build buildings is
amounting to 55 billion. If the project is successful, net income results
at the end of the first year amounted to 100 billion and nothing
again afterwards. If this project fails, then net income results
to be obtained is 20 billion at the end of the first year and 20
billion at the end of the second year. The annual effective interest is 15%. If
ANACOND immediately carried out the construction process (they took
bill of this project), then the project's chance of success is 50%. Dap-
Attention:
(a) NPV of this project.

(b) IRR if the project is unsuccessful.

Answer 1

a) Calculation of NPV

Year	Cashflow ($billion)	Present Value Cashflow($billion)
0	(55)	($55)
1	100	100/(1+15%)^1 =$86.956
	NPV = Cashoutflow - Present Value Cashflow	$31.956

When project fails

Year	Cashflow $billion	Present Value Cashflow
0	(55)
1	20	20/(1+15%)^1 =$17.391
2	20	20/(1+15%)^2 =$15.122
	Cumulative Present value Cashflow	$32.513
	Cash outflow	($55)
	NPV	($22.487)

Expected NPV = Probability of Success × NPV + Probability of unsuccessful × NPV

= 0.5×$31.956 + 0.5×(-22.486)

=$15.978 - $11.243

=$4.735

b. If Project is Unsuccessful:

Year	Cashflow $billion	Present Value Cashflow
0	(55)
1	20	20/(1-19%)^1=$24.69
2	20	20/(1-19%)^2=30.48
	Cumulative Present value Cashflow	$55.173
	NPV = Cashoutflow - Present value Cashflow	$55.173 - $55 =$0.173

IRR= lower Discount rate + positive NPV/ ( Positive NPV - Negative NPV) × difference in rates

Lower discount rate = -19%

Higher Discount rate =15%

Positive NPV@ (-19% discounted rate) = $0.173 billion

Negative NPV@ 15% =($22.486)billion.........refer(a)

IRR = -19%+($0.173/(0.173 -(-$22.48))× (15%-(-19%))

=-19% + 0.173/(0.173+22.48) × (15%+19%)

=-19% + $0.173/ $22.653 × 34%

=-19% + 0.259 = -18.74%

IRR, for unsuccessful project is -18.74%

Negative IRR would means that the total Cashflow after Investment are less than Initial Investment.