Last Tuesday, Blue Hamster Manufacturing Inc. lost a portion of its planning and
ID: 2618318 • Letter: L
Question
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 14.6%, but he cant 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 $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 Blue Hamster's 10% WACC. Given the data and hints, Project Zeta's initial investment is (rounded to the nearest whole dollar). and its NPV is A project's IRR will if the project's cash inflows increase, and everything else is unaffectedExplanation / Answer
Using IRR as discounting rate
At IRR NPV = 0 so Initial Investment = Present Value of cash flows discounted at IRR
A project's IRR will increase if the project's cash inflow increases and everything else is unaffected.
Best of Luck. God Bless
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