Attempts Keep the Highest 2 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 Green Caterpillar Garden Supplies Inc. Last Tuesday. Green Caterpillar Garden Supplies 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 retum (IRR) of Project Gamma is 13.25, but he can't recall how much Green Caterpillar 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 Gamma. They are: Year Year 1 Year 2 Cash Flow $2,400,000 $4,500,000 $4.500.000 $4,500,000 Year 3 Year 4 The CFO has asked you to computer Project Gamma's initial investment using the information currently valable 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 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 RR. The level of risk exhibited by Project Gamma is the same as that exhibited by the company's average project, which means that Project Gamma's net cash flows can be discounted using Green Caterpillar's 9 WACC. Given the data and hints, Project Gamma's initial investment is dollar), and NPV (rounded to the nearest whole A project's IRR will of the project's cash fewe decrease and everything has alfacted. Grade It Now Save & Continue Continue without saving