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 Zeta 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 detailed the annual net cash flows expected to be generated by Project Zeta. They are:

Year	Cash Flow
Year 1	$2,400,000
Year 2	$4,500,000
Year 3	$4,500,000
Year 4	$4,500,000

The CFO has asked you to compute Project Zeta’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 IRR.
•	The level of risk exhibited by Project Zeta is the same as that exhibited by the company’s average project, which means that Project Zeta’s net cash flows can be discounted using Green Caterpillar’s 7% WACC.

Given the data and hints, Project Zeta’s initial investment is (insert value) , and its NPV is (insert value   (rounded to the nearest whole dollar).

A project’s IRR will (increase/stay the same/decrease) if the project’s cash inflows decrease, and everything else is unaffected.

Answer 1

year pv @ 7% present value of cash inflows at 13.2% discount rate = NPV =0 At IRR, npv = 0 Calculation of initial investment: year cash flows pv @ 13.2% Present value 0 $0.00 $2,400,000 0.8834 $2,120,141.34 $4,500,000 0.7804 $3,511,718.21 $4,500,000 0.6894 $3,102,224.57 4 $4,500,000 0.6090 $2,740,481.07 1 2 cash flows -$11,474,565 $2,400,000 $4,500,000 $4,500,000 $4,500,000 0.9346 0.8734 0.8163 0.7629 Present value -$11,474,565 $2,242,991 $3,930,474 $3,673,340 $3,433,028 Initial investment $11,474,565 NPV $1,805,269 A project's IRR will decrease if cash flows decrease