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.