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 Fuzzy Button Clothing Company:

Last Tuesday, Fuzzy Button Clothing Company 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 $14\mathrm{.}6\%,$ but he can't recall how

much Fuzzy Button 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:

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 Fuzzy Button's $9\%$ WACC.

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

is

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

A project's IRR will

if the project's cash inflows increase, and everything else is

unaffected.