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 Gamma is $13\mathrm{.}2\%,$ 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 Gamma.

They are:

The CFO has asked you to compute Project Gamma'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 Gamma is the same as that exhibited by the

company's average project, which means that Project Gamma's net cash flows can be

discounted using Green Caterpillar's $9\%$ WACC.

Given the data and hints, Project Gamma's initial investment is

${?}_{-},$ and its NPV

is

$($rounded to the nearest whole dollar$).$

A project's IRR will

is unaffected.

if the project's cash inflows decrease, and everything else

if the project's cash inflows decrease, and everything else