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 its server and its backup server crashed. The companys CFO remembers that the internal rate of return (IRR) of Project Gamma is 11.30%, but he cant recall how much Blue Hamster originally invested in the project nor the projects net present value (NPV). However, he found a note that contained the annual net cash flows expected to be generated by Project Gamma. They are:

Year	Cash Flow
1	$1,600,000
2	3,000,000
3	3,000,000
4	3,000,000

The CFO has asked you to compute Project Gammas 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 Gamma is the same as that exhibited by the companys average project, which means that Project Gammas net cash flows can be discounted using Blue Hamsters 7.00% desired rate of return.

Given the data and hints, Project Gammas initial investment is 1.) $__________ , and its NPV is 2.) $___________ (both rounded to the nearest whole dollar).

CHOICES

1.)

a. $ 9,248,033

b. $ 7,990,172

c. $ 8,065,347

d. $ 8,263,830

2.)

a. $ 776,746

b. $ 733,593

c. $ 863,051

d. $ 1,035,661