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 Consider the case of Purzy Button Clothing Company: Last Tuesday, Fuzzy Button Clothing Company lost a portion of its planning and financial data when its server and its backup server crashed. The company's Cro remembers that the internal rate of return (IRR) of Project Omicron is 14,60%, 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 Omicron. They are: Year 1 2 Cash Flow $2,400,000 4,500,000 4,500,000 4,500,000 3 4 The CFO has asked you to compute Project Omicron's initial investment using the Information currently available to vol. 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 TRR The level of risk exhibited by Project. Omicron is the same as that exhibited by the company's average project, which means that Project Omicron's net cash flows can be discounted using Fuzzy Button's 8.00% desired rate of return. Year 1 Cash Flow $2,400,000 4,500,000 4,500,000 2. 3 4 4,500,000 The CFO has asked you to compute Project Omicron's initial investment using the information currently available to you. He has offered the following suggestions and observations: A project's TRR 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 $11,619,856 discounted using the project's TRR. The level of risk exhibited by Project Omicron is the same $11,119,596 d by the company's average project, which means that Project Omicron's net cash flows can be discounted using 1.00% desired rate of return $11,287,470 $12.952,056 Given the data and hints, Project Omicron's initial investment is whole dollar). and its NPV is (both rounded to the nearest Grade i Now Combi generated by Project Omicron. They are: Year 1 2 Cash Flow $2,400,000 4,500,000 4,500,000 4,500,000 3 4 The CFO has asked you to compute Project Omicron'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.valye of its cash inflows equals the discounted value of its cash outflows-When the cash flows are discounted using to $1,472,424 The level of risk exhibited by Project Omicron is the same as that exhibited by the company's $1,656,477 ft, which means that Project Omicron's net cash flows can be discounted using Fuzzy Button's 8.00% desired rate $2,208,636 $1,840,530 Given the data and hints, Project Omicron's initial investment is whole dollar) and its NPV IS (both rounded to the nearest