- Ch 11 Assignment The Basics Of Capital Budgeting Attempts Average 2 3 Understanding The Irr And Npv The Net Presen 1 (73.35 KiB) Viewed 184 times
Ch 11: Assignment - The Basics of Capital Budgeting Attempts Average / 2 3. 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 11.3%, 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: y Year Cash Flow Year 1 $1,800,000 Year 2 $3,375,000 Vear 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 intlows 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 Hamater's 9% WACC. Given the data and hints, Project Delta's initial investment is and NPV I (rounded to the nearest whole dollar) A projects IRR E the project's cath inflows increase, and everything else unaffected