Understanding the IRR and NPV

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 Delta is $11\mathrm{.}3\%,$ 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 Delta. They are:

Year $3,$$$3,375,000$

Year $4,$$$3,375,000$

The CFO has asked you to compute Project Delta'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 Delta is the same as that exhibited by the company's average project, which means that Project

Delta's net cash flows can be discounted using Blue Hamster's $9\%$ WACC.

Given the data and hints, Project Delta's initial investment is

$,$ and its NPV is

$($rounded to the nearest whole dollar$).$

A project's IRR will

$\_$ if the project's cash inflows increase, and everything else is unaffected.