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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 Cute Camel Woodcraft Company: Last Tuesday, Cute Camel Woodcraft Company lost a portion of its planning and finandal 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 Cute Camel originally invested in the project nor the project's net present value (NPV). However, hevound a note that detailed the annual net cash flows expected to be generated by Project Zeta. They are: 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 Cute Came's 10% WACC. 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. Assignment-The Basics of Capital Budgeting Blue Pencil Publishing is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,450,000 Blue Pencil Publishing has been basing capital budgeting decisions on a project's NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Pencil Publishing's WACC is 8%, and project Delta has the same risk as the firm's average project. he project is expected to generate the following net cash flows: Which of the following is the correct calculation of project Delta's IRR? 5.91% 4.37% 6.17% 5.14% If this is an independent project, the IRR method states that the firm should If the project's cast of capital were to increase, how would that affect the IRR? The IRR would not change. The IRR would decrease. The IRR would increase