Question

Q Search this course Ch 11: Assignment - The Basics of Capital Budgeting X The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up.front cost and subsequent flows. Consider the case of Blue Llama Mining Company: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $850,000 Blue Llama Mining Company 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. Blue Llama Mining Company's WACC is 9%, and project Sigma has the same risk as the firm's average project. The project is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $375,000 $500,000 $450,000 $475,000 Which of the following is the correct calculation of project Sigma's TRR? 31.45% 40.70% 42.55%

Answer 1

Year CF Year ICF 0 $(850,000.00) 0 |-850000 1 $ 375,000.00 1 375000 2 $ 500,000.00 2 500000 3 $ 450,000.00 3 450000 4 $ 475,000.00 4 475000 IRR 37.00% IRR 1=IRR(B2:B6) I

Accept the project

The IRR would not change