Question

On Monday, Eagle Manufacturing lost a portion of its planning and financial data when both its main and backup servers crashed. The company's CFO remembers that the IRR of project Alpha is 11.3%, But he can't recall how much Eagle originally invested in the project nor the project's NPV. However, he found a note that detailed the annual net cash flows expected to be generated by Project Alpha. They are:

Year 1 $2,000,000

Year 2 $3,750,000

Year 3 $3,750,000

Year 4 $3,750,000

The level of risk exhibited by Project Alpha is the same as that exhibited by the company's average project. The WACC for Eagle Manufacturing is 10%.

(a.) Given the data, what is Alpha's initial investment and NPV ?

(b.) A projects IRR will ______ if the projects cash flows increase and everything else is unaffected.

Please show calculations

Answer 1

Given information

IRR = 11.3%

Cahsflow

Year	Amount
1	2,000,000
2	3,750,000
3	3,750,000
4	3,750,000

a)

we have to calculate initial cash out flow. so as we know IRR is rate at which project cash outflow and present value of cash inflow are equal.

initial investment = Amount/(1+irr)ⁿ

initial investment= 2,000,000/(1.113) +3,750,000/(1.113)²+3,750,000/(1.113)³ +3,750,000/(1.113)⁴

Initial investment =9,987,714.42

NPV OF project. NPV will be calculated using WACC.

NPV= Present value of cash inflows - Initial cash outflow

=(2,000,000/(1.10) +3,750,000/(1.10)²+3,750,000/(1.10)³ +3,750,000/(1.10)⁴ - (9,987,714.42 )

= 1,02,96,086.31

=3,08,371.89

b) A projects IRR will __Increase____ if the projects cash flows increase and everything else is unaffected, Becasue increase in cashflow requires higher rate of discount, for converting present value of cashflows to intial investment.i.e IRR.