courses.aplia.com motive sale YouTube The net present value (NPV) and internal r
ID: 2516348 • Letter: C
Question
courses.aplia.com motive sale YouTube 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 Delta is 13.2%, 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 Delta. They are: Year Cash Flow Year 1 $2,400,000 Year 2 $4,500,000 Year 3 $4,500,000 Year 4 $4,500,000 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 Green Caterpillar's 9% wAcc. and its NPV is Given the data and hints, Project Delta's initial investment is (rounded to the nearest whole dollar). $13,329,689 $11,618,551 $11,938,112 $11,474,565 A project's IRR will ir the project's cash innows ecrease, and everything ese is unaffected. MacBook ProExplanation / Answer
Answer a.
Cash Flows:
Year 1 = $2,400,000
Year 2 = $4,500,000
Year 3 = $4,500,000
Year 4 = $4,500,000
IRR = 13.20%
Initial Investment = PV of Future Cash Flows at IRR
Initial Investment = $2,400,000/1.1320 + $4,500,000/1.1320^2 + $4,500,000/1.1320^3 + $4,500,000/1.1320^4
Initial Investment = $11,474,565
So, initial investment is $11,474,565
Answer b.
Cash Flows:
Year 0 = -$11,474,565
Year 1 = $2,400,000
Year 2 = $4,500,000
Year 3 = $4,500,000
Year 4 = $4,500,000
WACC = 9%
NPV = -$11,474,565 + $2,400,000/1.09 + $4,500,000/1.09^2 + $4,500,000/1.09^3 + $4,500,000/1.09^4
NPV = $1,177,569
So, NPV of this project is $1,177,569
Answer c.
A project’s IRR will decrease if the project’s cash inflows decrease, and everything else is unaffected.
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