Last Tuesday, Blue Hamster Manufacturing Inc. lost a portion of its planning and

Question

Last Tuesday, Blue Hamster Manufacturing 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 11.3%, but he can't recall how much Blue Hamster 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: 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 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 Blue Hamster's 8% WACC. Given the data and hints, Project Gamma's initial investment is (rounded to the nearest whole dollar). and its NPV is the poscash infows increase, and everything else ls unaffected. A project's IRR will

Explanation / Answer

Initial investment = 11,985,257.31

NPV = 974,869.02

increase

11.30% Cash flows Year Discounted CF                             -   0 0.00        2,400,000.00 1 2156334.23        4,500,000.00 2 3632638.53        4,500,000.00 3 3263826.17        4,500,000.00 4 2932458.38

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