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Understanding the IRR and NPV he net present value (NPV) and internal rate of return (IRR) methods of investment analysis are interrelated and are sometimes
Understanding the IRR and NPV he net present value (NPV) and internal rate of return (IRR) methods of investment analysis are interrelated and are sometimes used togeth ake capital budgeting decisions. onsider 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 intemal rate of return (IRR) of Project Zeta is 13.2\%, 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 Zeta. They are: The CFO has asked you to compute Project Zeta's initial investment using the information currently available to you. He has offered the following suggestions and observations: - A project's tRR represents the return the project would generate when its NPV is zero or the digcounted value of its cash inflows equals the discounted value of its cash outflows-when the cash flows are discounted using the project'a IRR. - The level of risk exhibited by Project Zeto is the same as that exhabited by the company's averaoe project, which means that Project Zeto's net cash flowo can be discounted using Green Coteroilar's 7% WACc
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