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Last Tuesday, Green Caterpillar Garden Supplies Inc. lost a portion of its planning and financial data when both itsmain and its backup servers crashed. The company's CFO remembers that the internal rate of return (IRR) of ProjectOmicron is 11.3%, but he can't recall how much Green Caterpillar originally invested in the project nor the project'snet present value (NPV). However, he found a note that detailed the annual net cash flows expected to be generatedby Project Omicron. They are:Cash FlowYear$2,000,000Year 1Year 2$3,750,000$3,750,000Year 3Year 4$3,750,000The CFO has asked you to compute Project Omicron's initial investment using the information currently available toyou. 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 thediscounted value of its cash inflows equals the discounted value of its cash outflows-when thecash 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'saverage project, which means that Project Omicron's net cash flows can be discounted usingGreen Caterpillar's 9% WACC.Given the data and hints, Project Omicron's initial investment isand its NPV is(rounded to the nearest whole dollar)A project's IRR willif the project's cash inflows increase, and everything else is unaffected.

Question
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.
help_outline

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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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check_circleAnswer
Step 1

Calculation of initial investment and NPV:

Answer:

Initial investment is $9,987,714 and NPV is $555,731

Internal rate of return (IRR) is the rate at which NPV is zero.

Excel workings:

Years
Cash flows
$2,000,000
$3,750,000
1
2
3
S3,750,000
4
S3,750,000
$9,987,714
S555,731
Initial investment
NPV
help_outline

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Years Cash flows $2,000,000 $3,750,000 1 2 3 S3,750,000 4 S3,750,000 $9,987,714 S555,731 Initial investment NPV

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Step 2

Excel reference:

...
A
B
Years
Cash flows
2000000
3750000
3750000
3750000
2 1
3 2
4 3
5 4
6
|=NPV(11.3%,B2:B6)
|=NPV(9%,B2:B6)-B7
Initial investment
8NPV
help_outline

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A B Years Cash flows 2000000 3750000 3750000 3750000 2 1 3 2 4 3 5 4 6 |=NPV(11.3%,B2:B6) |=NPV(9%,B2:B6)-B7 Initial investment 8NPV

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