The net present value (NPV) and internal rate of return (IRR) methods of Investm

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 this case: Last Tuesday, Blue Hamster Manufacturing Inc. lost a portion of its planning and financial data when its server and its backup server crashed. The company's CFO remembers that the internal rate of return (IRR) of Project Delta is 14.6%, 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 contained the annual net cash flows expected to be generated by Project Delta. They are: 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. 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 10% WACC. Given the data and hints, Project Delta's initial investment is, 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.

Explanation / Answer

1)

Initial investment = -8339697

NPV:

NPV = 926781

Projects IRR will increase if the cash flow increases

IRR= 14.60% Year 0 1 2 3 4 Cash flow stream -8339696.65 1800000 3375000 3375000 3375000 Discounting factor 1 1.146 1.313316 1.50506 1.724799 Discounted cash flows project -8339696.7 1570681 2569831 2242435 1956750 Sum of discounted future cashflows = 9.3132E-10 =NPV Discounting factor = (1 + Required rate)^(CORRESPONDING PERIOD IN YEARS) Discounted Cashflow= Cash flow stream/discounting factor

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