Question

The net present value (NPV) and internal rate of return (IRR) methods of investment analysis are interrelated and are sometimes used together to make capital budgeting decisions.

Consider the case of Green Caterpillar Garden Supplies Inc.:

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 14.6%, 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	$2,000,000
Year 2	$3,750,000
Year 3	$3,750,000
Year 4	$3,750,000

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 8% WACC.

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

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

Answer 1

1 first we have guess the cash infow of investment and calculated the IRR 11.25%. AS BELOW 3 period discount cash inflow factor 0:10,000,000.00 1 2,000,000.00 213,750,000.00 3,750,000.00 4 3,750,000.00 discounted value 1.00 -10,000,000.00 Guess 0.87 1,745,200.70 0.76 2,855,367.63 0.66 2,491,594.79 0.58 2,174,166.49 total -733,670.39 IRR 11.25% CALCULATED REQUIRED rate 14.60% 14 USING GOAL SEEK FUNCTION we have to bring the total of discounted value to zero. X 17 Goal Seek ? Set cell: SD$10 To value: By changing cell: $854 OK Cancel

AFTER pressing the ok the value in cell B4 turns to 9,266,329.61 which is the answer of initial investment.

1 first we have guess the cas discount factor 3 period Guess 5 6 1 2 cash inflow - 10000000 2000000 3750000 3750000 3750000 =+C4/1.146 =+C5/1.146 =+C6/1.146 =+C7/1.146 discounted value =+B4.04 =+B5*C5 =+B6*C6 =+B7 C7 =+B8*08 total =SUM(D4:09) IRR =IRR(B4:38) CALCULATED

now calculation of the net present value of the project.

D 17 now calculating the net presnet value at discount rateof 8% discount discounted 18 period cash inflow factor value 0 -9,266,329.61 1.00 -9,266,329.61 1 2,000,000.00 0.93 1,851,851.85 2 3,750,000.00 0.86 3,215,020.58 3l 3,750,000.00 0.79 2,976,870.90 4 3,750,000.00 0.74 2,756,361.95 NPV 1,533,775.67

A Project IRR will increase if the project cash inflows decrease, and everything else is unaffected