Question

Butler International Limited is evaluating a project in Erewhon. The project will create the following cash flows:

  

Year	Cash Flow
0	–$	1,310,000
1		485,000
2		550,000
3		445,000
4		400,000

  

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 3 percent.

  

If the company uses a required return of 13 percent on this project, what are the NPV and IRR of the project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places, e.g., 32.16. Enter your IRR answer as a percent.)

  

NPV	$
IRR		%

Answer 1

Correct Answer:

NPV @ 13%

$          1,03,669.03

Working:

Year	Cash flow	PV@13%	Present value of cash flow
1	$        4,85,000	$ 0.8850	$                4,29,204
2	$        5,50,000	$ 0.7831	$                4,30,731
3	$        4,45,000	$ 0.6931	$                3,08,407
4	$ 400000	$ 0.6133	$                2,45,327
Total			$          14,13,669.0
Less: Initial Cash outflow			$           (13,10,000)
NPV 1			$          1,03,669.03

Requirement 2:

IRR

17.10%

Working:

For calculating IRR, we need to assume an additional discount rate at which the NPVis negative, lets R2 = 20%

IRR = R1+ (NPV1/(NPV1-NPV2)*(R2-R1)

NPV1	$ 1,03,669.03
NPV2	$   (73,464.51)
NPV1-NPV2	1,77,133.54
NPV1/(NPV1-NPV2)	0.585259188
R1	13%
R2	20%
R2-R1	7%
IRR	17.10%

Year	Cash flow	PV@20%	Present value of cash flow
1	$        4,85,000	$ 0.8333	$                4,04,167
2	$        5,50,000	$ 0.6944	$                3,81,944
3	$        4,45,000	$ 0.5787	$                2,57,523
4	$        4,00,000	$ 0.4823	$                1,92,901
Total			$       12,36,535.49
Less: Initial Cash outflow			$           (13,10,000)
NPV 2			$           (73,464.51)

End of Answer.

Thanks