Question
Last Tuesday, Cold Goose Metal Works Inc. lost a portion of its planning and financial data when both its main and its backup servers crashed.
Last Tuesday, Cold Goose Metal Works Inc. lost a portion of its planning and financial data when both its main and its backup servers crashed. The companys CFO remembers that the internal rate of return (IRR) of Project Lambda is 11.3%, but he cant recall how much Cold Goose originally invested in the project nor the projects net present value (NPV). However, he found a note that detailed the annual net cash flows expected to be generated by Project Lambda. They are:
Year | Cash Flow |
---|---|
Year 1 | $2,400,000 |
Year 2 | $4,500,000 |
Year 3 | $4,500,000 |
Year 4 | $4,500,000 |
The CFO has asked you to compute Project Lambdas 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 Lambda is the same as that exhibited by the companys average project, which means that Project Lambdas net cash flows can be discounted using Cold Gooses 7% WACC. Given the data and hints, Project Lambdas initial investment is _____ and its NPV is _____ (rounded to the nearest whole dollar). A projects IRR will _____(increase, decrease, stay the same) if the projects cash inflows increase, and everything else is unaffected. |
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