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 Cold Goose Metal Works Inc.: Last Tuesday, Cold Goose Metal Works 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 13.8%, but he can't recall how much Cold Goose 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 Year 1 Year 2 Year 3 Year 4 Cash Flow $1,800,000 $3,375,000 $3,375,000 $3,375,000 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 Cold Goose's 8% WACC.

Answer 1

Initial Investment

The question has given he Internal Rate of Return [IRR] as 13.80%, IRR is the rate at which the present value of the annual cash flow equals to the initial Investment or it can say that at IRR, the present value of the annual cash flow = Initial Investment, or at IRR, NPV will be Zero

Initial Investment = Present Value of the annual cash inflows discounted at 13.80%

Year	Annual Cash Flow	Present Value factor at 13.20%	Present Value of Cash Flow
1	18,00,000	0.8787346	15,81,722
2	33,75,000	0.7721745	26,06,089
3	33,75,000	0.6785365	22,90,061
4	33,75,000	0.5962535	20,12,356
TOTAL			84,90,228

“Therefore, the Initial Investment is $8,490,228“

Net Present Value (NPV)

Year	Annual Cash Flow	Present Value factor at 8.00%	Present Value of Cash Flow
1	18,00,000	0.9259259	16,66,667
2	33,75,000	0.8573388	28,93,519
3	33,75,000	0.7938322	26,79,184
4	33,75,000	0.7350299	24,80,726
TOTAL			9,720,095

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $9,720,095 - $8,490,228

= $1,229,867

“The Net Present Value (NPV) will be $1,229,867”

“Given the data and hints, Project Zeta’s Initial Investment is $8,490,228 and it’s NPV is $1,229,867”

A Project’s IRR will “DECREASE” if the Project’s cash flows decreases, and everything else is unaffected.

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.

Answer 2

this kids answer is wrong lol not even close