3. Understanding the IRR and NPV 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 Green Caterpillar Garden Supplies Inc. 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 Zeta is 14.6%, but he can't recall how much Green Caterpillar 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 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 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 Green Caterpillar's 8% WACC. 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 intemal rate of return (IRR) of Project Zeta is 14.6%, but he can't recall how much Green Caterpillar 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 1 $2,000,000 Year 2 $3,750,000 Year 3 $3,750,000 $3,750,000 Year 4 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 Green Caterpillar's 8% WACC. Given the data and hints, Project Zeta's initial Investment is dollar). and its NPV is (rounded to the nearest whole A project's IRR will if the project's cash inflows decrease, and everything else is unaffected. billar Garden Supplies Inc.: er Garden Supplies Inc. lost a portion of its planning and financial data when both its main and 's CFO remembers that the internal rate of return (IRR) of Project Zeta is 14.6%, but he can't ally invested in the project nor the project's net present value (NPV). However, he found a note Hows expected to be generated by Project Zeta. They are: te Project Zeta's initial investment using the information currently available to you. He has offe he return the project would generate when its NPV is zero or the discounted value of its cash ir = of its cash outflows--whes $10,793,380 are discounted using the project's IRR. y Project Zeta is the same d by the company's average project, which means th $9,266,330 e discounted using Green WACC. $9,406,225 $9,683,213 Zeta's initial Investment is + and its NPV is (rounded to th if the project's cash inflows decronco and ect nor merated by Project Zeta. They are: cial investment using the information currently available to you. He has ect would generate when its NPV is zero or the discounted value of its ca -ws-when the cash flows are discounted usin $1,303,709 IRR the same as that exhibited by the company's ct, which mea $1,687,153 ng Green Caterpillar's 8% WACC. $1,533,775 $1,840,530 vestment is and its NPV is (rounded t arniert's cash inflour dog Year 1 $2,000,000 Year 2 $3,750,000 Year 3 $3,750,000 Year 4 $3,750,000 e CFO has asked you to compute Project Zeta's initial investmer uggestions and observations: A project's IRR represents the return the project would gener equals the discounted value of its cash outflows-when the ca The level of risk exhibited by Project Zeta is the same as that Zeta's net cash flows can be discounted using Green Caterpilla stay the same Given the data and increase ta's initial investment is dollar). decrease A project's IRR will if the project's cash inflows dec