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

The year 0 cash flow is -$592,000. The year 1 cash flow is 222,000. The year 2 is 165,000. The year 3 cash flow is 230,000. The year 4 cash flow is 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.

a. What is the NPV of the project?

b. What is the IRR of the project?

Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.


### Step-by-Step Solution:

#### a. **Calculating the Net Present Value (NPV)**

The NPV formula is:

\[
\text{NPV} = \sum \left( \frac{C_t}{(1 + r)^t} \right) - C_0
\]

Where:
- $C_t$ = cash flow at time $t$,
- $r$ = required return (discount rate),
- $t$ = time period,
- $C_0$ = initial investment (negative cash flow at $t = 0$).

However, since the Erewhonian government blocks the cash flows and reinvests them at 5% for one year, we need to account for this. Each cash flow starting from year 1 will be reinvested for one additional year at 5%, and we will only receive the funds after that.

So, we first adjust each cash flow based on the reinvestment, then discount them at the required rate of 13%.

**Steps**:
1. Reinvest each cash flow for one year at 5%:
   \[
   \text{Future Value of Cash Flow} = C_t \times (1 + 0.05)
   \]

2. Discount each reinvested cash flow back to the present at 13%:
   \[
   \text{Present Value of Cash Flow} = \frac{\text{Future Value}}{(1 + 0.13)^{t+1}}
   \]
   
#### Reinvesting and Discounting:

1. **Year 1 Cash Flow:**
   \[
   \text{Future Value of 222,000} = 222,000 \times 1.05 = 233,100
   \]
   \[
   \text{Present Value} = \frac{233,100}{(1.13)^2} = 183,004.26
   \]

2. **Year 2 Cash Flow:**
   \[
   \text{Future Value of 165,000} = 165,000 \times 1.05 = 173,250
   \]
   \[
   \text{Present Value} = \frac{173,250}{(1.13)^3} = 122,050.12
   \]

3. **Year 3 Cash Flow:**
   \[
   \text{Future Value of 230,000} = 230,000 \times 1.05 = 241,500
   \]
   \[
   \text{Present Value} = \frac{241,500}{(1.13)^4} = 148,207.86
   \]

4. **Year 4 Cash Flow:**
   \[
   \text{Future Value of 209,000} = 209,000 \times 1.05 = 219,450
   \]
   \[
   \text{Present Value} = \frac{219,450}{(1.13)^5} = 119,855.97
   \]

Finally, sum all the present values of future cash flows and subtract the initial investment:

\[
\text{NPV} = 183,004.26 + 122,050.12 + 148,207.86 + 119,855.97 - 592,000 = -18,881.79
\]

So, the **NPV** of the project is **-$18,881.79**.

---

#### b. **Calculating the Internal Rate of Return (IRR)**

The IRR is the discount rate that makes the NPV equal to zero. To calculate IRR, we use the cash flows without adjusting for the reinvestment (since IRR uses the unadjusted cash flows).

The cash flows for IRR are:
- Year 0: -$592,000
- Year 1: $222,000
- Year 2: $165,000
- Year 3: $230,000
- Year 4: $209,000

We need to solve for $r$ in the following equation:

\[
0 = -592,000 + \frac{222,000}{(1 + r)} + \frac{165,000}{(1 + r)^2} + \frac{230,000}{(1 + r)^3} + \frac{209,000}{(1 + r)^4}
\]

Using a financial calculator or software to solve for $r$, we find:

\[
\text{IRR} = 11.64\%
\]

---

### Final Answers:
a. **NPV** = -$18,881.79  
b. **IRR** = 11.64%

---

Do you want more details or have any questions on this process?  
Here are 5 related questions to explore this further:

1. How does reinvestment impact the project cash flows in terms of NPV?
2. What is the relationship between NPV and IRR when making investment decisions?
3. Why is the IRR lower than the required return of 13% in this case?
4. How does the blocking policy of the Erewhonian government influence project evaluation?
5. What would happen to the NPV if the required return were higher or lower?

**Tip**: The IRR method can sometimes be misleading if used alone, especially when cash flows are non-standard. Always compare it with NPV for better decision-making!

Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows: The year 0 cash flow is -$592,000. The year 1 cash flow is 222,000. The year 2 is 165,000. The year 3 cash flow is 230,000. The year 4 cash flow is 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. a. What is the NPV of the project? b. What is the IRR of the project?

Learn how to calculate the NPV and IRR for Anderson International Limited's project in Erewhon. This problem explores the impact of reinvestment policies, using a discount rate of 13% and reinvestment rate of 5%. Detailed step-by-step guide provided, suitable for finance students.

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