INTERNAL RATE OF RETURN (IRR ) 1. Fuzzy Badger Transport Company is evaluating a

Question

INTERNAL RATE OF RETURN (IRR)

1. Fuzzy Badger Transport Company is evaluating a proposed capital budgeting (project Delta) that will require an initial investment of $1,400,000.

Fuzzy Badger Transport 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 better method because percentages and returns are easier to understand and to compare to required returns. Fuzzy Badger Transport Company’s WACC is 10% 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

$400,000

Year 4

$425,000

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

a. 4.01%

b. 4.41%

c. 3.21%

d. 4.81%   

2. If this is an independent project, the IRR method states that the firm should _____

a. Reject project Delta

b. Accept project Delta

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

a. The IRR would decrease

b.The IRR would not change

c. The IRR would increase

Year

Cash Flow

Year 1

$300,000

Year 2

$425,000

Year 3

$400,000

Year 4

$425,000

Explanation / Answer

1)correct option is "A" -4.01%

At ,4.01% ,The present value of cash flows =Initial investment.

2)correct option is "A" -Reject project delta

Since IRR is less than cost of capital.

3)correct option is "B" -The IRR would not change.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.