3. Understanding the IRR and NPV Aa Aa 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 Fuzzy Button Clothing Company: Last Tuesday, Fuzzy Button Clothing Company 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 Delta is 11.3%, but he can't recall how much Fuzzy Button 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 Cash Flow Year 1 $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 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 Fuzzy Button's 7% WACC. Given the data and hints, Project Delta'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 unaffected