Question

1. 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 13%, 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%.

1. Given the data, what is Alpha's initial investment and NPV ?

Answer 1

Initial Investment = Present Value of all cash inflows discounted at IRR i.e. 13% in this case

Calculation of Initial Investment
Year	Cashflow	PV factor @ 13%	Present Value
1	2000000	0.8850	1770000
2	3750000	0.7831	2936625
3	3750000	0.6931	2599125
4	3750000	0.6133	2299875
	Initial Investment	9605625

Calculation of NPV
Year	Cashflow	PV factor @ 10%	Present Value
1	2000000	0.9091	1818182
2	3750000	0.8264	3099000
3	3750000	0.7513	2817375
4	3750000	0.6830	2561250
		Total	10295807
	-	Initial Invt	9605625
		NPV	690181.8