Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:

Year	Cash Flow
0	−$ 592,000
1	222,000
2	165,000
3	230,000
4	209,000 												All cash flows will occur in Erewhon and are expressed in dollars. In an attempt to improve its economy, the Erewhonian government has declared that all cash flows created by a foreign company are “blocked” and must be reinvested with the government for one year. The reinvestment rate for these funds is 5 percent. Assume Anderson uses a required return of 13 percent on this project.  What is the NPV of the project?

To calculate the Net Present Value (NPV) of this project, we need to consider two key factors:

1. **Blocked cash flows:** Since the cash flows are blocked for one year and reinvested at a 5% rate, each cash flow will be compounded for one year at 5% before being discounted to the present value.
   
2. **Required return:** Anderson International uses a required return of 13% to discount the cash flows.

Let's follow the step-by-step process:

### Step 1: Adjust Cash Flows for the Reinvestment Rate
Each cash flow (except for the initial investment) must be reinvested for one year at a 5% rate.

\[
\text{Adjusted Cash Flow} = \text{Cash Flow} \times (1 + \text{Reinvestment Rate})
\]

- For Year 1 cash flow: 
\[
222,000 \times (1 + 0.05) = 222,000 \times 1.05 = 233,100
\]
- For Year 2 cash flow:
\[
165,000 \times (1 + 0.05) = 165,000 \times 1.05 = 173,250
\]
- For Year 3 cash flow:
\[
230,000 \times (1 + 0.05) = 230,000 \times 1.05 = 241,500
\]
- For Year 4 cash flow:
\[
209,000 \times (1 + 0.05) = 209,000 \times 1.05 = 219,450
\]

### Step 2: Discount the Adjusted Cash Flows to Present Value
Now we will discount each adjusted cash flow to present value using the required return of 13%.

The formula for present value (PV) is:

\[
\text{PV} = \frac{\text{Future Cash Flow}}{(1 + \text{Discount Rate})^t}
\]

Where:
- $ \text{Discount Rate} = 13\% = 0.13 $
- $ t $ is the number of years.

- For Year 2 (adjusted Year 1 cash flow):
\[
PV_2 = \frac{233,100}{(1 + 0.13)^2} = \frac{233,100}{1.13^2} = \frac{233,100}{1.2769} = 182,558.36
\]
- For Year 3 (adjusted Year 2 cash flow):
\[
PV_3 = \frac{173,250}{(1 + 0.13)^3} = \frac{173,250}{1.13^3} = \frac{173,250}{1.4436} = 119,985.48
\]
- For Year 4 (adjusted Year 3 cash flow):
\[
PV_4 = \frac{241,500}{(1 + 0.13)^4} = \frac{241,500}{1.13^4} = \frac{241,500}{1.6309} = 148,091.27
\]
- For Year 5 (adjusted Year 4 cash flow):
\[
PV_5 = \frac{219,450}{(1 + 0.13)^5} = \frac{219,450}{1.13^5} = \frac{219,450}{1.8429} = 119,049.10
\]

### Step 3: Calculate NPV
The NPV is the sum of the present values of the cash flows, including the initial investment:

\[
\text{NPV} = -592,000 + PV_2 + PV_3 + PV_4 + PV_5
\]
\[
\text{NPV} = -592,000 + 182,558.36 + 119,985.48 + 148,091.27 + 119,049.10
\]
\[
\text{NPV} = -592,000 + 569,684.21 = -22,315.79
\]

### Final Answer:
The Net Present Value (NPV) of the project is **−$22,315.79**.

This means that the project would result in a small loss at the given required return rate of 13%.

Would you like further details on any of the steps or calculations?

---

Here are some related questions you might find useful:
1. How does changing the required return rate affect the NPV?
2. What is the impact of the reinvestment rate on NPV?
3. How do we interpret a negative NPV for a project?
4. Can the payback period be calculated for this project?
5. What if the cash flows weren't blocked by the government—how would that change the result?

**Tip:** A negative NPV indicates that a project does not meet the required return rate and might not be a good investment unless strategic or other qualitative factors are considered.

Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows: Year Cash Flow 0 −$ 592,000 1 222,000 2 165,000 3 230,000 4 209,000. All cash flows will occur in Erewhon and are expressed in dollars. In an attempt to improve its economy, the Erewhonian government has declared that all cash flows created by a foreign company are 'blocked' and must be reinvested with the government for one year. The reinvestment rate for these funds is 5 percent. Assume Anderson uses a required return of 13 percent on this project. What is the NPV of the project?

Learn how to calculate the Net Present Value (NPV) of a project for Anderson International Limited. This step-by-step solution explains how to account for blocked cash flows, reinvestment at 5%, and discounting with a 13% required return. Suitable for finance students and professionals.

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