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5. Understanding the IRR and NPV The net present value (NPV) and internal rate of retum (IRR) methods of investment analysis are interrelated and are

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5. Understanding the IRR and NPV The net present value (NPV) and internal rate of retum (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 Tuesdiry, Cold Goose Metal Works Inc. lost a portion of its planning and financal data when both its main and its backup servers . cashed. The company's CrO remembers that the internal rate of return (IRR) of Project Zeta is 13.8%, 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 Zeta. They are: The CO 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 outfows-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 Projed Zeta's net cash flows can be discounted using Cold Goose's 8\% WACC. Gren the data and hints, Project Zeta'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

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