Question
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NPV and IRR: Unequal Annual Net Cash Inflows Assume that Goodrich Petroleum Corporation is evaluating a...
NPV and IRR: Unequal Annual Net Cash Inflows
Assume that Goodrich Petroleum Corporation is evaluating a capital
expenditure proposal that has the following predicted cash
flows:
| Initial Investment | $(48,660) |
| Operation | |
| Year 1 | 16,000 |
| Year 2 | 26,000 |
| Year 3 | 21,000 |
| Salvage | 0 |
a. Using a discount rate of 10 percent, determine the net present
value of the investment proposal.
$Answer (Round answer to the nearest whole number.)
b. Determine the proposal's internal rate of return. (Refer to
Appendix 12B if you use the table approach.)
Round to the nearest percent. (Example: 0.15268 = 15%)
Answer%
Solutions
Expert Solution
Solution a:
| Computation of NPV - Goodrich Petroleum Corporation | ||||
| Particulars | Period | PV Factor | Amount | Present Value |
| Cash outflows: | ||||
| Initial Investment | 0 | 1 | $48,660.00 | $48,660 |
| Present Value of Cash outflows (A) | $48,660 | |||
| Cash Inflows | ||||
| Year 1 | 1 | 0.90909 | $16,000.00 | $14,545 |
| Year 2 | 2 | 0.82645 | $26,000.00 | $21,488 |
| Year 3 | 3 | 0.75131 | $21,000.00 | $15,778 |
| Present Value of Cash Inflows (B) | $51,811 | |||
| Net Present Value (NPV) (B-A) | $3,151 | |||
Solution b:
For computation of IRR, lets calculate NPV at 13% and 14% discount rate.
| Computation of NPV - Goodrich Petroleum Corporation | ||||||
| Discount Rate - 13% | Discount Rate - 14% | |||||
| Particulars | Period | Amount | PV Factor | Present Value | PV Factor | Present Value |
| Cash outflows: | ||||||
| Initial Investment | 0 | $48,660.00 | 1 | $48,660 | 1 | $48,660 |
| Present Value of Cash outflows (A) | $48,660 | $48,660 | ||||
| Cash Inflows | ||||||
| Year 1 | 1 | $16,000.00 | 0.88496 | $14,159 | 0.87719 | $14,035 |
| Year 2 | 2 | $26,000.00 | 0.78315 | $20,362 | 0.76947 | $20,006 |
| Year 3 | 3 | $21,000.00 | 0.69305 | $14,554 | 0.67497 | $14,174 |
| Present Value of Cash Inflows (B) | $49,075 | $48,216 | ||||
| Net Present Value (NPV) (B-A) | $415 | -$444 | ||||
IRR = 13% + ($415 - $0) / ($415 - (-$444)) = 13.48% = 13% (Rounded off to nearest percent)
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