Question

ervlet/quiz?quiz action-takeQuiz&quiz probGuid-QNAPCOA80101000000316059600500008 ctx azissu-00328cksm 1523333 shse- Watch TV N Netflix-Watch TV S YouTube Portal Log-in/Citizen f Facebook W aldogroup lizakhan@yaho 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: Year Cash Flow Year 1 $2,200,000 Year 2 $4,125,000 Year 3 $4,125,000 Year 4 $4,125,000 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 (rounded to the nearest whole dollar). , and its NPV is A project's IRR will if the project's cash inflows decrease, and everything else is unaffected.

Answer 1

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

IRR is the rate at which NPV = 0

0 = Initial investment + 2200000/(1+0.113)^1 + 4125000/(1+0.113)^2 + 4125000/(1+0.113)^3 + 4125000/(1+0.113)^4

Initial Investment = $10986485.87

NPV @ 9%

NPV = 10986485.87 + 2200000/(1+0.09)^1 + 4125000/(1+0.09)^2 + 4125000/(1+0.09)^3 + 4125000/(1+0.09)^4

NPV = $611303.58

- Project's IRR will decrease, if the cashflows decrease.