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The CFO has asked you to compute Project Zetas initial investment using the information currently available to you. He has offered the following suggestions and
The CFO has asked you to compute Project Zetas 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 Zeta is the same as that exhibited by the companys average project, which means that Project Zetas net cash flows can be discounted using Blue Hamsters 10% WACC. |
Last Tuesday, Blue Hamster Manufacturing 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 return (IRR) of Project Zeta is 13.8%, but he can't recall how much Blue Hamster 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 Zeta. They are: Year Cash Flow Year 1 $1,800,000 Year 2 $3,375,000 Year 3 $3,375,000 Year 4 $3,375,000 Given the data and hints, Project Zeta's initial investment is and its NPV is (rounded to the nearest whole dollar). decrease stay the same Given the data and ta's initial investment is and its NPV is (rounded to the near increase A project's IRR will if the project's cash inflows increase, and everything else is unaffected
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