6. 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. Blue Hamster Manufacturing Inc. lost a portion of its planning and financial data when its server and its backup server crashed. The companys CFO remembers that the internal rate of return (IRR) of Project Omicron is 14.60%, but he cant recall how much Blue Hamster originally invested in the project nor the projects net present value (NPV). However, he found a note that contained the annual net cash flows expected to be generated by Project Omicron. They are: Year Cash Flow 1 $2,000,000 2 $3,750,000 3 $3,750,000 4 $3,750,000 The CFO has asked you to compute Project Omicrons initial investment using the information currently available to you. He has offered the following suggestions and observations: A projects 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 outflowswhen the cash flows are discounted using the projects IRR. The level of risk exhibited by Project Omicron is the same as that exhibited by the companys average project, which means that Project Omicrons net cash flows can be discounted using Blue Hamsters 8.00% desired rate of return. Given the data and hints, Project Omicrons initial investment is , and its NPV is (both rounded to the nearest whole dollar).