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 Year 1 Year 2 Cash Flow $2,000,000 $3,750,000 $3,750,000 $3,750,000 Year 3 Year 4 VO Year 1 Year 2 $2,000,000 $3,750,000 $3,750,000 $3,750,000 Year 3 Year 4 The CFO has asked you to compute Project Zeta's Initial investment using the Information currently avaliable 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. and its NPV is (rounded to the nearest whole Given the data and hints, Project Zeta's initial investment is dollar) A project's IRR will if the project's cash inflows decrease, and everything else is unaffected. 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 cu suggestions and observations: A project's IRR represents the return the project would generate when its NPV is zero equals the discounted value of its cash outflows-whed $10,793,380 are discounted The level of risk exhibited by Project Zeta is the same d by the compar $9,266,330 Zeta's net cash flows can be discounted using Green WACC. $9,683,213 $9,406,225 and its NPV Given the data and hints, Project Zeta's initial investment is dollar). A project's IRR will if the project's cash inflows decrease, and everything MacBook Air PO DOO Year 1 Year 2 $2,000,000 $3,750,000 $3,750,000 $3,750,000 Year 3 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 TRR represents the return the project would generate when its NPV is zero or the discomete value of its cash inflows equals the discounted value of its cash outflows--when the cash flows are discounted usid 51,533,775 IRR. The level of risk exhibited by Project Zeta is the same as that exhibited by the company's $1,380,398 st, which means that Project Zeta's net cash flows can be discounted using Green Caterpillar's 8% WACC. $1,763,841 $1,687,153 and its NPV is Given the data and hints, Project Zeta's initial investment is dollar). (rounded to the nearest whole A project's IRR will ir the project's cash inflows decrease, and everything else is unaffected. Ted 4 Year 2 ZUUUUUU $3,750,000 $3,750,000 $3,750,000 Year 3 Year 4 The CFO has asked you to compute Project Zeta's initial Investment using the information currently available to you. He has offered th 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 Pre Zeta's net cash flows can be discounted using Green Caterpillar's 8% WACC. stay the same ka's initial investment is increase and its NPV is (rounded to the near Given the data and dollar). decrease A project's IRR will if the project's cash inflows decrease, and everything else is unaffected