Question

Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require...

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.

Homework Answers

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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