Question

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

Year Cash Flow

0 -39,000,000

1 57,000,000

2 -9,000,000

a) If the company requires a return of 10% on its investments, should it accept this project? Why?

b) Compute the IRR for this project. How many IRR's are there? If you apply the IRR decision rule, should you accept the project or not? Whats going on here?

I'd like to solve this problem in excel.

Thank you!

Answer #1

IRR is being calculated as in below:

IRR Formula in Excel is = IRR(Values, Guess)

IRR Formula is calculated as =[Cash Flows/ (1+r)^i ] - Initial Investment

a) Yes the company is getting 28% as IRR return which is more than 10% of it's expected, so the company should accept this project since it's giving more than required expected return.

b) Computation is solved as in the above screenshot. IRR is 28%.
There are three IRR's there with one positive cash flow preceded
and followed by two negative cash flows. If a project has a
non-normal cash flow, it can have multiple IRRs. This project has
**two** IRR's. Project should be accepted as the IRR
is positive.

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Year Cash Flow
0 –$ 85,000,000
1 125,000,000
2 – 15,000,000
A. If the company requires a 10% return on its investment should
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Year
Cash Flow
0
-28,000,000
1
53,000,000
2
-8,000,000
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Year
Cash Flow
0
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1
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2
–9,000,000
a.
If the company requires a 10 percent return on its investments,
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Year
Cash Flow
0
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1
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2
–
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a. If the company requires a return of 11 percent
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No, the IRR is above the 12% hurdle rate
Cannot determine because there are multiple IRRs
Yes, the NPV is positive
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Year
Cash Flow
0
–$
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1
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–
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a-1
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Year 2 $ (15,000,000)
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