Question

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 8%, 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 | $325,000 |

Year 2 | $450,000 |

Year 3 | $400,000 |

Year 4 | $475,000 |

Which of the following is the correct calculation of project Delta’s IRR?

**3.74%**

**3.37%**

**4.49%**

**3.55%**

If this is an independent project, the IRR method states that
the firm should **(Accept/Reject)**.

If the project’s cost of capital were to increase, how would that affect the IRR?

**The IRR would not change.**

**The IRR would decrease.**

**The IRR would increase.**

Answer #1

PFB the solution .. excel formula is provided in pic..

year | Cash flow | ||||

0 | -1,500,000.00 | ||||

1 | 325000 | ||||

2 | 450000 | ||||

3 | 400000 | ||||

4 | 475000 | ||||

IRR = | 3.74% | ||||

Ans 1 | ans = | 3.74% | |||

Ans 2 | Project should be - REJECTED | ||||

Ans 3 | Correct answer is option - The IRR would not change. | ||||

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