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 Cold Goose Metal Works Inc: Last Tuesday, Cold Goose Metal Works 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 Gamma is 11.3%, but he can't recall how much Cold Goose 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 Gamma. They are: The CFO has asked you to compute Project Gamma'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 outfows-when the cash flows are discounted using the project's IRR. - The level of risk exhibited by Project Gamma is the same as that exhibited by the company's average project, which means that Project Gamma's net cash flows can be discounted using Cold Goose's 10% WACC. Given the data and hints, Project Gamma's initial investment is and its NPV is (rounded to the nearest whole. dollar). A project's IRR will If the project's cash inflows increase, and everything else is unaffected. CFO has asked you to compute Project Gamma's initial investment using the information currently agestions and observations: - A project's IRR represents the return the project would ganarata whan its NPV is zero or the disco equals the discounted value of its cash outflows-when th re discounted using the pro - The level of risk exhibited by Project Gamma is the same ed by the company's avera Project Gamma's net cash flows can be discounted using 0% WACC. Siven the data and hints, Project Gamma's initial investment is and its NPV is dollar). jal investment using the information currently available to you. He has offered the follo would generate when its NPV is zero or the discounted value of its cash inflows -when the cash flows are discounted using $246,697 IRR. same as that exhibited by the company' using Cold Goose's 10% WACC. $222,027 $197,358 $234,362 stment is and its NPV is (rounded to the nearest whole - A project's IRR represents the return the project would generate when its equals the discounted value of its cash outflows-when the cash flows are - The level of risk exhibited by Project Gamma is the same as that exhibited Project Gamma's net cash flows can be discounted using Cold Goose's 10% Given the data and mma's initial investment is dollar). A project's IRR will if the project's cash inflows increase, and