Cash Flows:
Year 0 = -$850,000
Year 1 = $275,000
Year 2 = $400,000
Year 3 = $450,000
Year 4 = $425,000
Let IRR be i%
NPV = -$850,000 + $275,000/(1+i) + $400,000/(1+i)^2 +
$450,000/(1+i)^3 + $425,000/(1+i)^4
0 = -$850,000 + $275,000/(1+i) + $400,000/(1+i)^2 +
$450,000/(1+i)^3 + $425,000/(1+i)^4
Using financial calculator, i = 26.85%
IRR of Project Sigma = 26.85%
If this is an independent project, the IRR method states that the firm should accept this project.
If the project’s cost of capital were to increase, the IRR would increase.
Falcon Freight is evaluating a proposed capital budgeting project (project Sigma) that will require an initial...
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...
Falcon Freight is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $900,000. 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 9%, and project Sigma has the...
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Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $900,000. 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...
2. Internal rate of return (IRR) Aa Aa 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 cash flows. Consider the case of Falcon Freight: Consider the following case: 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...