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Light Sweet Petroleum, Inc, is trying to evaluate a generation project with the following cash flows: Year Cash Flow 0 −$45,000,000 1 71,000,000 2 −15,000,000 What is the IRR? If the company requires a return of 12 percent on its investments, should it accept this project? Why? Assume an individual makes a lump sum investment at the beginning of year one of $20,581, the present value of which is $20,581
Light Sweet Petroleum, Inc, is trying to evaluate a generation project with the following cash flows:
Year Cash Flow
0 −$45,000,000
1 71,000,000
2 −15,000,000
What is the IRR?
If the company requires a return of 12 percent on its investments, should it accept this project? Why?
Assume an individual makes a lump sum investment at the beginning of year one of $20,581, the present value of which is $20,581. The investor's discount rate, for an alternative safe investment, is 6.75 percent after tax. The expected return on this investment (received at each year-end) is as follows.
Year 1: 1,562
Year 2: 13,949
Year 3: 18,151
Year 4: 10,676
Year 5: 6,463
What is the net present value of the investment under consideration?
Expert Solution
IRR = 32.65%
If the company requires a return of 12 percent on its investments, so the company should accept the project because the IRR is greater than the required return.
The net present value (NPV) = $20,927.40
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