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.