Question

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 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. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $300,000 Year 2 $425,000 Year 3 $475,000 $450,000 Year 4 Which of the following is the correct calculation of project Delta's IRR? 2.95% 3.14% 4.06% 2GO

Answer 1

B8 fx EIRR(B3:37) А B E 1 2 year 3 4 5 Cash flows 0 $(15,00,000.00) 11 $ 3,00,000.00 2 $ 4,25,000.00 3 $ 4,75,000.00 4 $ 4,50,000.00 3.69%) 6 7 8 IRR 9 10 Do not accept the Project, because IRR is less than Cost of Capital 11 12 The IRR would not change 13 14