Help rai :)) 69% .- Sat 1:27 AM Last Tuesday, Green Caterpillar Garden Supplies

Question

Help rai :)) 69% .- Sat 1:27 AM Last Tuesday, Green Caterpillar Garden Supplies 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 Gama is 14.6%, but he ant mall how much Green Caterpillar originally i vested 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 Gamma. They are: Year 1 $2,200,000 Year 2 $4,125,000 Year 4 $4,125,000 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 discountéd value of its cash inflows equals the discounted value of its cksh outflows--when the cash flows are discounted using the projedt's IRR . The average project, which means that Project Gamma's net cash flows can be discounted using Given the data and hints, Project Gamma's initial investment is , and its NPV is

Explanation / Answer

IRR is the rate of return at which NPV of the project is equal to zero.

Hence, Initial Investment = PV of cash flows discounted at IRR

= 2,200,000 / (1 + 14.6%) + 4,125,000 / (1 + 14.6%)^2 + 4,125,000 / (1 + 14.6%)^3 + 4,125,000 / (1 + 14.6%)^4

= $10,192,963

Now, NPV = PV of cash flows discounted at cost of capital - Initial Investment

= 2,200,000 / (1 + 7%) + 4,125,000 / (1 + 7%)^2 + 4,125,000 / (1 + 7%)^3 + 4,125,000 / (1 + 7%)^4 - 10,192,963

= $1,980,218

If the cash flows decreases, the IRR will decrease as well.

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