Question

Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows: Year Cash Flow 0 –$ 40,500,000 1 62,500,000 2 – 15,500,000
a. If the company requires a return of 11 percent on its investments, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $
b. Compute the IRRs for this project. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. Enter the larger IRR in the first answer box and the smaller IRR in the second answer box. If you can only calculate one IRR, enter it in both boxes to receive partial credit. A negative answer should have a minus sign.) Internal rate of return % Internal rate of return %

Answer 1

Answer:

A. $3,226,158.59

B. Larger IRR 23.28%

Smaller IRR -68.95%

Explanation:

a. Calculation to determine the NPV of the project

Net Present Value (NPV) = -$40,500,000 + $62,500,000 / (1+.11) - $15,500,000 /( 1+.11)^2

Net Present Value (NPV) = -$40,500,000 + $62,500,000 / 1.11 - $15,500,000 / 1.11^2

Net Present Value (NPV) = $3,226,158.59

Therefore Net Present Value (NPV) of this project is $3,226,158.59

B. Computation for the IRRs for this project

We will be Using excel to compute the IRRs for this project

0 = -$40,500,000 + $62,500,000 / (1+.11) - $15,500,000 /( 1+.11)^2

= -$40,500,000 + $62,500,000 / 1.11 - $15,500,000 / 1.11^2

= $3,226,158.59

Using excel to calculate

A B

1 Year Cash Flow

2 0 -$40,500,000

3 1 $62,500,000

4 2 -$15,500,000

NPV $3,226,158.59

Excel formula NPV(11%,B3:B4)+B2

Larger IRR 23.28%

Excel formula IRR(B2:B4,0%)

Smaller IRR -68.95%

Therefore the IRRs for this project are :

Larger IRR 23.28%

Smaller IRR -68.95%