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?

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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.