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Aa Aa 3. Understanding the IRR and NPV The net present value (NPV) and intenal rate of return (IRR) methods of investment analysis are interrelated and are sometimes used together to make capital budgeting decisions Consider the case of Cold Goose Metal Works Inc. Last Tuesday, Cold Goose Metal Works 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 Omicron is 11.3%, but he can't recall how much Cold Goose 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 Omicron. They are: Year Cash Flow Yeari $2,000,000 Year 2 $3,750,000 Year 3 $3,750,000 Year4 $3,750,000 The CFO has asked you to compute Project Omicron'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 projet 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 dscounted uasing the project s IER The level of risk exhibited by Project Omicron is the same as that exhibited by the company's average project, which means that Project Omicron's net cash flows can be discounted using Cold Goose's 10% WACC. , and its NPV is Given the data and hints, Project Omicron's initial investment is (rounded to the nearest whole dollar), A project's IRR will f the projet's cash inflows decrease, and everything else is unaffected. Grode It Now Save &Continue Conrinue without saving

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