Question

Last Tuesday, Green Caterpillar Garden Supplies Inc. lost a portion of its planning and financial data when both its main and its backup servers crashed. The company's CFO remembers that the internal rate of return (IRR) of Project Gamma is 13.2%, but he can't recall how much Green Caterpillar originally invested in the project nor the project's net present value (NPV). However, he found a note that detalled the annual net cash flows expected to be generated by Project Gamma. They are: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $2,400,000 $4,500,000 $4,500,000 $4,500,000 The CFO has asked you to compute Project Gamma's initial investment using the information currently available to you. He has offered the following suggestions and observations: • A project's IRR represents the return the project would generate when its NPV is zero or the discounted value of its cash inflows equals the discounted value of its cash outflows when the cash flows are discounted using the project's TRR • The level of risk exhibited by Project Gamma is the same as that exhibited by the company's average project, which means that Project Gamma's net cash flows can be discounted using Green Caterpillar's 9% WACCI . and its NPV is (rounded to the nearest whole Given the data and hints, Project Gamma's initial investment is dollar). A project's IRR will if the project's cash inflows decrease, and everything else is unaffected.

Answer 1

present value of cash inflows at 13.2% discount rate NPV 0 At IRR, npv 0 Calculation of initial investment: cash flows Present value cash flows Present value pv@ 13.2% pv@ 9% year year $o.00 -$11,474.565 -$11,474,565 0 1 1 $2,120,141.34 $3,511,718.21 $2,400,000 $2,400,000 $2,201,835 0.8834 1 1 0.9174 $3,787,560 $3,474,826 $3,187,913 $4,500,000 $4,500,000 0.7804 2. 0.8417 $4,500,000 $4,500,000 $3,102,224.57 0.7722 0.6894 $4,500,000 $2,740,481.07 $4,500,000 0.7084 4 0.6090 4 $1,177,569 $11,474,565 Initial investment NPV A project's IRR will decrease if cash flows decrease