Problem 1: Anderson International Limited is calculating a project in Erewhon. The project will make the following cash flows:
Year Cash Flow
0 –$ 1,270,000
i) All cash flows will occur in Erewhon and are expressed in term of dollars. In an attempt to enhance its economy, the Erewhonian government has declared that all cash flows made by a foreign company are ‘blocked’ and should be reinvested with the government for 1 year. The reinvestment rate for these funds is five percent.
ii) When Anderson uses a required return of the 12 percent on this project, what are NPV and IRR of the project?