Question

Free Spirit Industries is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. The 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. Free Spirit Industries's WACC is 8%, 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 Year 1 Year 2 Year 3 Year 4 Cash Flow $350,000 $475,000 $425,000 $500,000 O 32.47% 38.20% 30.56% 34.38% If this is an independent project, the IRR method states that the firm should project Sigma.

Answer 1

YEAR cash flows -$800,000 $350,000 $475,000 $425,000 $500,000 38.20% IRR(B2:36) 10 IRR 38.20% 11 Should accept he project 12 13 The project with the greatest IRR.