Question

he 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 cash lows. Consider this case: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,500,000. 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 percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company's WACC is 9% , and project Delta has the same risk as the firm's average project he project is expected to generate the following net cash flows: Cash Flow Year Year 1 $300,000 Year 2 $425,000 Year 3 $475,000 $ 450,000 Year 4 Vhich of the following is the correct calculation of project Delta's IRR? 2.95% 4.43% 4.24% 3.69% Tn ore tocorch

Answer 1

The required answer is option D i.e. 3.69%

Year	Cash Flow
0	-1500000
1	300000
2	425000
3	475000
4	450000
IRR	3.69%

Use formula of IRR in Excel and select the range of cash flow form year 0 to year 4 then you will get the IRR rate.

$=IRR(Values)$

If this is an independent project the IRR method states that the firm should Reject the project because its IRR is less then WACC.

If the project cost of capital were to increase then IRR would also increase because when project WACC would be increase then company would like to earn more income.

I hope this clear your doubt.

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