Understanding the IRR and NPV

The net present value $($NPV$)$ and intemal rate of retum $($IRR$)$ methods of investment analysis are interrelated and are sometimes used together to

make capital budgeting decisions.

Consider 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 $14\mathrm{.}6\%,$ 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 irvestment 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 Zeta is the same as that exhibited by the company's average project, which means that Project

Zeta's net cash flows can be discounted using Green Caterpillar's B$\%$ WACC.

Given the data and hints, Project Zeta's initial irvestment is $.$

and its NPV is

$($rounded to the nearest whole

dollar$).$

A project's IRR will

if the project's cash inflows decrease, and everything else is unaffected.