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.
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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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 Zeta 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 Zeta. 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 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 Green Caterpillar's 7% 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.
Expert Solution
Step 1
Net Present Value:
It is computed by reducing the initial investment from the sum of present-worth cash flows. The project is acceptable under NPV criteria when the net present value is positive.
Internal Rate of Return:
It is the rate at which the project's NPV equals zero. Hence, the present value of annual cash flows is made equal to the initial cost at the internal rate of return.
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