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 Blue Hamster Manufacturing Inc.:

Last Tuesday, Blue Hamster Manufacturing 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 Blue Hamster 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	$1,800,000
Year 2	$3,375,000
Year 3	$3,375,000
Year 4	$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 Blue Hamster’s 10% WACC.

Given the data and hints, Project Zeta’s initial investment is$9,874,235   , and its NPV is   (rounded to the nearest whole dollar).

A project’s IRR will   if the project’s cash inflows increase, and everything else is unaffected.

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Page Layout Formulas File Home Insert Data Review View Add-Ins E AutoSum - Cut AC Wrap Text Calibri 11 General ECopy Fill Conditional Format Formatting as Table Styles Sort & Find & Filter Select Merge & Center Insert Delete Format Paste B I U Cell % Format Painter Clear Clipboard Alignment Font Number Styles Cells Editing fox OW185 ON 00 ОP OR OS OT OU OV OW OX OY 179 PV FACTOR 180 year PV OF CFAT CFAT AT 13.8% IRR IS THE RATE WHERE NPV = 0 OR IN OTHER WORDS, INVESTMENT = PV OF CASHFLOWS SsO INVESTMENT = A*B 8490228 181 A В 1581722 182 1 1800000 0.8787 0.7722 183 3375000 2606089 184 3 3375000 0.6785 2290061 185 4 3375000 0.5963 2012356 186 PV = 8490228 187 188 PV FACTOR ANSWERS 189 year AT 10% 8490 CFAT PV OF CFAT VESTMENT A B 190 A NPV 776250 191 0 -8490228 1 -8490228 192 0.9091 1636364 1 1800000 2789256 193 2 3375000 0.8264 A-PROJECT'S IRR WILL INCREASE, IF PROJECT'S CASH FLOW INCREASES 194 3 3375000 0.7513 2535687 2305170 & EVERYTHING ELSE IS UNAFFECTED 195 4 3375000 0.6830 196 NPV 776250 197 STEIN REPLACEMENT S HPR GMAM BETA LEVERED NPV IRRnpvbeta RATION PBP ARR invest, EAA RELEVANT MI-np-ir EAC MACRS REPLACEMENT BOND OPTION TO WAIT erences: NL296 130% W 00:56 ENG 22-11-2019