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.

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.