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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
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. 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 Lambda is 14.60%, 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 Lambda. They are: The CFO has asked you to compute Project Lambda'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 discounted value of its cash infows 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 Lambdo is the same as that exhibited by the company's average project, which means that Project Lambda's net cash nows can be discounted using Blue Hamster's 7.00% desired rate of return. Given the data and hints, Project Lambda's initial investment is whole dollar). , and its NPV is (both rounded to the nearest
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