3. Understanding the IRR and NPVThe net present value (NPV) and in.docx

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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 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 14.6%, 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
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Unformatted text preview: � note that detailed the annual net cash flows expected to be generated by Project Zeta. They are: Year Cash Flow 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: Given the data and hints, Project Zeta s initial investment is � , and its NPV is (rounded to the nearest whole �� �� dollar). A project s IRR will if the project s cash inflows � �� � decrease, and everything else is unaffected. Year Cash FlowYear 1$2,000,000Year 2$3,750,000Year 3$3,750,000Year 4$3,750,000...
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