Question

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CENGAGE MINDTAP Ch 11: Assignment - The Basics of Capital Budgeting 2. Internal rate of return (IRR) 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 Blue Llama Mining Company: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. 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 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: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $350,000 $475,000 $425,000 $500,000

Answer 1

Formula is in pic..

	Year	Cash flow
	0	-800000
	1	350000
	2	475000
	3	425000
	4	500000
Ans 1	IRR =	38.20%
	Ans =	38.20%
Ans 2	IRR method suggest that the firm should ACCEPT the project
Ans 3	Correct answer is option :	the IR will not change