Question

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

  

Year	Cash Flow
0	–$	38,200,000
1		62,200,000
2	–	11,200,000

  

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.)

  

  

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

  

b.	This project has two IRR's, namely			percent and	42.21	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

a) 1) NPV = -38200000 + 62200000/1.12-11200000/1.12^2 =$8,407,142.86

a 2) As the NPV is positive, the company should invest in the project. (YES)

b) The project's IRR (r) is the discount rate at which NPV = 0. Hence r is given by

-38200000 + 62200000/(1+r)-11200000/(1+r)^2 = 0

=> -191+311/(1+r)-56/(1+r)^2 = 0  

or 191*x^2 -311*x+56 =0 (if 1+r=x)

=> x = (311+sqrt(311^2-4.*191*56))/(2*191)

= 1.4221 or 0.206169

or 1+r=1.4221 or 0.206169

so, r= 0.4221 or -0.7938

So, there are two values of IRR namely -79.38% and 42.21% in order from smallest to largest