Question

1. Kong Petroleum, Inc. is trying to evaluate a generator project with the following cash flows:

Year	Cash Flow
0	-28,000,000
1	53,000,000
2	-8,000,000

1. If the company requires a 10% return on its investments, should it accept this project? Why?
2. Compute the IRR for this project. How many IRRs are there? If you apply the IRR decision rule, should you accept the project or not? What’s going on here?

*Please type the calculations and answers*

Answer 1

a.

Net Present value = Present value of cash inflows - initial investment

= 53000000 /1.10 -8000000/1.1^2 - 28000000

= 13,570,247.93

The NPV is positive company shoould accept the project

b. IRR is the rate at which the present value of cash inflows is equal to cash outflows

28 = 53 / ( 1+IRR) - 8 / ( 1 + IRR)^2

Let us use Financial calculator

CF0	CF1	FR1	CF2	FR2
-28	53	1	-8	1

IRR < CPT < 72.75%

IRR is higher than the cost of capital hence the project should be accepted.

There is one IRR for the project as there is one sign change in the stream of cash flows