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. Fuzzy Button Clothing Company lost a portion of its planning and financial data when its server and its backup server crashed. The company's CFO remembers that the internal rate of return (IRR) of Project Lambda is 13.20%, 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 contained the annual net cash flows expected to be generated by Project Lambda. They are: Year Cash Flow 1 $1,800,000 2 $3,375,000 3 $3,375,000 4 $3,375,000 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 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 Fuzzy Button's 7.00% desired rate of return. equals the discounted value of its cash outflows-when th $9,997,267 re discounted using the project's IRR. The level of risk exhibited by Project Lambda is the same Project Lambda's net cash flows can be discounted using $8,605,924 ed by the company's average project, which means that 7.00% desired rate of return. $8,953,584 $8,713,913 Given the data and hints, Project Lambda's initial investment is whole dollar). and its NPV is ' (both rounded to the nearest ect, which means that equals the discounted value of its cash outflows-when the cash flows are discounted using $1,353,951 RR. The level of risk exhibited by Project Lambda is the same as that exhibited by the company Project Lambda's net cash flows can be discounted using Fuzzy Button's 7.00% desired rate $1,286,253 $1,421,649 $1,624,741 Given the data and hints, Project Lambda's initial investment is whole dollar). and its NPV is ' (both rounded to the nearest