3. Understanding the IRR and NPV The net present value (NPV) and internal rate of return (IRR) methods of Investment make capital budgeting decisions Consider the case of Blue Hamster Manufacturing Inc Last Tuesday, Blue Hamster Manufacturing Inc. lost a portion of its planning and financial data when both its main and servers crashed. The company's CFO remembers that the internal rate of retur (IRR) of Project Zeta is 13.8%, but he can't reca much Blue Hamster originally invested in the project nor the project's net present value (NPV). However, he found a note that deta the annual net cash flows expected to be generated by Project Zeta. They are: Year Cash Flow Year 1 Year 2 Year 3 Year 4 $1,800,000 $3,375,000 $3,375,000 $3,375,000 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 Represents the return the project would generate when it NPV is zero or the discounted value of its cash inflows equals the count of h o w when the cash flows are discounted using the project's RR. The level of by P e ts the same as that by the company's average project, which means that Zet's how can be cont a cter's 10% WACC 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 us $853,875 ct's IRR. The level of risk exhibited by Project Zeta is the same as that exhibited by the company $931,500" on Joject, which means that Project Zeta's net cash flows can be discounted using Blue Hamster's 10% WACC. $815,063 5776,250 Given the date and ints, Project Zeta's initial investment is and its NP is (rounded to the nearest whole dollar). A project's IRR will the project's cash inflows increase, and everything else is unaffected Last Tuesday, Blue Hamster Manufacturing 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 13.8%, but he can't recall Now much Blue Hamster 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 Year 3 Year 4 Cash Flow $1,800,000 $3,375,000 $3,375,000 $3,375,000 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 Blue Hamster's 10% WACC. stay the same increase Given the data and a's initial investment and its NPV is (rounded to the nearest whole dollar). decrease A project's IRR will if the project's cash inflows increase, and everything else is unaffected