Consider the case of Blue Hamster Manufacturing Inc.: 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 Lambda is 13.8%, 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 Lambda. They are: Year Cash Flow Year 1 $2,200,000 Year 2 $4,125,000 Year 3 $4,125,000 000

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Consider the case of Blue Hamster Manufacturing Inc.:
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
Lambda is 13.8%, 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 Lambda. They are:
Year
Cash Flow
Year 1
$2,200,000
Year 2
$4,125,000
Year 3
$4,125,000
Year 4
$4,125,000
The CFO has asked you to compute Project Lambda'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 Lambda is the same as that exhibited by the company's
average project, which means that Project Lambda's net cash flows can be discounted using Blue
Hamster's 8% WACC.
Given the data and hints, Project Lambda'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 increase, and everything else is unaffected.
Transcribed Image Text:Consider the case of Blue Hamster Manufacturing Inc.: 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 Lambda is 13.8%, 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 Lambda. They are: Year Cash Flow Year 1 $2,200,000 Year 2 $4,125,000 Year 3 $4,125,000 Year 4 $4,125,000 The CFO has asked you to compute Project Lambda'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 Lambda is the same as that exhibited by the company's average project, which means that Project Lambda's net cash flows can be discounted using Blue Hamster's 8% WACC. Given the data and hints, Project Lambda'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 increase, and everything else is unaffected.
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