Question

Falcon Freight is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,600,000.

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 percentages and returns are easier to understand and to compare to required returns. Falcon Freight’s WACC is 9%, and project Delta has the same risk as the firm’s average project.

The project is expected to generate the following net cash flows:

Year	Cash Flow
Year 1	$375,000
Year 2	$500,000
Year 3	$425,000
Year 4	$500,000

Which of the following is the correct calculation of project Delta’s IRR?

4.72%

4.01%

4.96%

4.25%

If this is an independent project, the IRR method states that the firm should ____

Answer 1

YEAR cash flows -$1,600,000 $375,000 $500,000 $425,000 $500,000 4.72% IRR(B2:B6) Answers: Reject the project