Question

Falcon Freight is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. Falcon Freight has been basing capital budgeting decisions on a project's NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Falcon Freight's WACC is 896, and project Sigma has the same risk as the firm's average project The project is expected to generate the following net cash flows: Which of the following is the correct calculation of project Sigma's IRR? Year Cash Flow Year $350,000 Year 2 $475,000 Year 3 $425,000 Year 4 $500,000 О 32.47% O 36.2990 O 38.2090 О 34.38% If this is an independent project, the IRR method states that the firm should accept project Sigma reject project Sigma If the project's cost of capital were to increase, how would that affect the IRR? O The IRR would not change O The IRR would decrease. The IRR would increase

Answer 1

As the IRR is More than 8% WACC Accept the Project

IRR will not change with Cost of Capital