Question

6 x Assignment 11 - The Basics of Capital Budgeting LAS TU , U PONIBLY OPTIONS P O UR VOLD WEICH and its backup servers crashed. The company's CFO remembers that the internal rate of return (IRR) of Project Delta Is 13.2%, 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 Delta. 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 Delta'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. ALAKUL • The level of risk exhibited by Project Delta is the same as that exhibited by the company's average project, which means that Project Delta's net cash flows can be discounted using Blue Hamster's 7% WACC. and its NPY Given the data and hints, Project Delta's initial investment is (rounded to the nearest whole dollar). A project's IRR will 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 1 $0.00 1 $2,400,000 0.8834 $2,120,141.34 2 $4,500,000 0.7804 $3,511,718.21 $4,500,000 0.6894 $3,102,224.57 $4,500,000 0.6090 $2,740,481.07 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 $1,805,268 Initial investment $11,474,565 NPV A project's IRR will decrease if cash flows decrease