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)

ekkarill92 answered 1 year ago

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