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 Omicron is 11.3%, 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 Omicron. They are: Cash Flow Year $2,000,000 Year 1 Year 2 $3,750,000 $3,750,000 Year 3 Year 4 $3,750,000 The CFO has asked you to compute Project Omicron'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 Omicron is the same as that exhibited by the company's average project, which means that Project Omicron's net cash flows can be discounted using Green Caterpillar's 9% WACC. Given the data and hints, Project Omicron'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.
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 Omicron is 11.3%, 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 Omicron. They are: Cash Flow Year $2,000,000 Year 1 Year 2 $3,750,000 $3,750,000 Year 3 Year 4 $3,750,000 The CFO has asked you to compute Project Omicron'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 Omicron is the same as that exhibited by the company's average project, which means that Project Omicron's net cash flows can be discounted using Green Caterpillar's 9% WACC. Given the data and hints, Project Omicron'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.
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 2EB: Boxer Production, Inc., is in the process of considering a flexible manufacturing system that will...
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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
Omicron is 11.3%, 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 Omicron. They are:
Cash Flow
Year
$2,000,000
Year 1
Year 2
$3,750,000
$3,750,000
Year 3
Year 4
$3,750,000
The CFO has asked you to compute Project Omicron'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 Omicron is the same as that exhibited by the company's
average project, which means that Project Omicron's net cash flows can be discounted using
Green Caterpillar's 9% WACC.
Given the data and hints, Project Omicron'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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