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 Blue Hamster Manufacturing Inc.: 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 Lambda 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 Lambda. They are: Year Cash Flow Year 1 Year 2 $1,600,000 $3,000,000 $3,000,000 $3,000,000 Year 3 Year 4 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 Blue Hamster's 10% WACC. Given the data and hints, Project Lambda's initial investment is (rounded to the nearest whole dollar). and its NPV is Year Cash Flow Year 1 Year 2 $1,600,000 $3,000,000 $3,000,000 $3,000,000 Year 3 Year 4 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 Blue Hamster's 10% WACC. Given the data and hints, Project Lambda's initial investment is (rounded to the nearest whole dollar). and its NPV is A project's IRR will if the project's cash inflows decrease, and everything else is unaffected. increase decrease stay the same Blue Pencil Publishing is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $900,000. Blue Pencil Publishing has been basing capital budgeting decisions on a project's NPV; however, its new Cho wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Blue Pencil Publishing's WACC is 9%, and project Sigma has the same risk as the firm's average project. The project is expected to generate the following net cash flows: Year Cash Flow Which of the following is the correct calculation of project Sigma's IRR? Year 1 Year 2 $300,000 $425,000 $475,000 $450,000 Year 3 O 27.27% O 23.18% 021.82% 0 24.54% Year 4 If this is an independent project, the IRR method states that the firm should accept project Sigma reject project Sigma If mutually exclusive projects are proposed that both have an IRR greater than the necessary WACC, the IRR method states that the firm should accept: The project with the greatest IRR, assuming that both projects have the same risk as the firm's average project The project that requires the lowest initial investment, assuming that both projects have the same risk as the firm's average project The project with the greater future cash inflows, assuming that both projects have the same risk as the firm's average proiect