Question

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

Year Cash Flow

0 = –$38,000,000

1 = $62,000,000

2 = – $11,000,000

a-1. What is the NPV for the project if the company requires a return of 11 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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

b. (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.)

This project has two IRR's, namely _______ percent and ________ percent, in order from smallest to largest.

Answer 1

NPV=C0+ CF1/(1+r)^1 + CF2/(1+r)^2 …………CFn/(1+r)^n

=-38000000+ 62000000/1.11 – 11000000/1.11^2

=$8,928,009

Yes the project should be accepted since NPV is positive.

IRRs are: 42.9% and -79.74%

WORKINGS