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 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 internal 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: Year Cash Flow Year 1 $2,400,000 Year 2 $4,500,000 Year 3 $4,500,000 Year 4 $4,500,000 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 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 79% WACC. Given the data and hints, Project Zeta's initial investment is dollar). A project's IRR will and its NPV is if the project's cash inflows decrease, and everything else is unaffected. (rounded to the nearest whole
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 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 internal 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: Year Cash Flow Year 1 $2,400,000 Year 2 $4,500,000 Year 3 $4,500,000 Year 4 $4,500,000 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 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 79% WACC. Given the data and hints, Project Zeta's initial investment is dollar). A project's IRR will and its NPV is if the project's cash inflows decrease, and everything else is unaffected. (rounded to the nearest whole
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter21: Dynamic Capital Structures And Corporate Valuation
Section: Chapter Questions
Problem 5MC: David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing....
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Transcribed Image Text: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 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 internal 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:
Year
Year 1.
Year 2
Year 3
Year 4
Cash Flow
$2,400,000
$4,500,000
$4,500,000
$4,500,000
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 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 7% WACC.
Given the data and hints, Project Zeta's initial investment is
dollar).
A project's IRR will
, and its NPV is
if the project's cash inflows decrease, and everything else is unaffected.
(rounded to the nearest whole
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