Question

NPV and IRR: Unequal Annual Net Cash Inflows
Assume that Goodrich Petroleum Corporation is evaluating a capital expenditure proposal that has the following predicted cash flows:

Initial Investment	$(58,220)
Operation
Year 1	23,000
Year 2	31,000
Year 3	22,000
Salvage	0

a. Using a discount rate of 10 percent, determine the net present value of the investment proposal.
$Answer (Round answer to the nearest whole number.)

b. Determine the proposal's internal rate of return. (Refer to Appendix 12B if you use the table approach.)
Round to the nearest percent. (Example: 0.15268 = 15%)
Answer%

Answer 1

a)

NPV = cash flow / (1+r)1 + cash flow / ( 1+r)2 + Cash flow / (1+r ) n  - initiat investment

NPV = 23000/ (1+0.10) + 31000/(1+0.10)2 + 22000/ (1+.10)3 - 58220

= 20909.09 + 25619.83 + 16528.92 - 58220

= 63,057.85 - 58220

= $ 4837.85

b)

Internal rate of return :

Trial and error method, we already done a trial by using 10% discount rate on part a.it got a positive value ( $4837.85).now we have to take another rate for getting a negative NPV.

NPV @ 15 %

NPV = 23000/(1.15) + 31000 / +(1.15)2 + 22000/(1.15)3 - 58220

= 20000 +23440.45 +14465.35 - 58220

= 57905.81 - 58220

= -314.19

IRR = A +[( C - 0 ) / ( C - D )] * ( B - A)

A = lowest discount rate

C - 0 = lowest discount NPV

D = highset discount rate ,total of all cash flow

B = highest discount rate

IRR =10 %+[( 4837.85) /(63,057.85 - 57,905.81)*5

= 10 % + [( 4837.85 /5152.04)] * 5

= 10% +( 0.9390 * 5)

= 10% + 4.695

= 14.69%