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 Blue Hamster Manufacturing Inc.: 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 Lambda is 11.3%, 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 detailed 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 followir 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 Lambda is the same as that exhibited by the company's average project, which means that Project Lambda's net cash flows can be discounted using Blue Hamster's 7\% WACC. - A project's IRR represents the return the proji equals the discounted value of its cash outflov - The level of risk exhibited by Project Lambda Project Lambda's net cash flows can be discol Given the data and hints, Project Lambda's initial investment is dollar). o or the discounted value of its cash inflows I using the project's IRR. mpany's average project, which means that , and its NPV is (rounded to the nearest whole 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 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 t$1,359,306R. - The level of risk exhibited by Project Lambda is the same as that exhibited by the company's $1,100,390 Project Lambda's net cash flows can be discounted using Blue Hamster's 7\% WACC. $1,229,848 $1,294,577 Given the data and hints, Project Lambda'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 decrease, and everything else is unaffected. - 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 Lambda is the same as that exhibited by the company's average project, which means that Project Lambda's net cash flows can be discounted using Blue Hamster's 7\% WACC. Given the data and dollar). nbda's initial investment is , and its NPV is (rounded to the nearest whol A project's IRR will if the project's cash inflows decrease, and everything else is unaffected