Question

Cutler Petroleum, Inc., is trying to evaluate a generation project with the following cash flows

Year	Cash Flow
0	–$	38,500,000
1		62,500,000
2	–	11,500,000

  

a-1	What is the NPV for the project if the company requires a return of 12 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV

$

  

a-2	Should the firm accept this project?
	No Yes

  

b.

This project has two IRRs, namely percent and percent, in order from smallest to largest. (Note: If you can only compute one IRR value, you should input that amount into both answer boxes in order to obtain some credit.) (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer a(1):

Working:

Answer a(2):

Yes

Project should be accepted as NPV is positive.

Answer (b):

This project has two IRRs, namely -78.84% and 41.18% in order from smallest to largest.

Working:

We get one IRR through excel function IRR:

The excel IRR function also has an input value requirement for 'guess':

To get the second IRR which is negative we need to change the 'guess' value by decreasing it say by 10% each time:

As shown below when 'guess value' is -70%, we get the second IRR = -78.84%