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 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 intemal rate of retum (IRR) of Project Gamma 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 Gamma. They are: The CFO has asked you to compute Project Gamma's initial investment using the information currently avallable 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 equais the discounted value of its cash outhows-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 Fuzzy Button's 7% Wacc. Given the data and hints, Project Gamma's initial investment is , and its NPV is (counded to the nearest whole doliar). A projects IRR WIII If the project's cash inflows increase, and everything else is unatfected