XXX company is evaluating a proposed capital budgeting project (project Delta) t

Question

XXX company is evaluating a proposed capital budgeting project (project Delta) that requires an initial investment of $1,600,000. The CFO wants to use the IRR method to make new decisions. The company's WACC is 8% and the project has the same risk as the firm's average project. The project is expected to generate the following net cash flows: Year 1 - $375,000, Year 2 - $500,000, Year 3 - $450,000, Year 4 - $475,000. Which of the following is the correct calculation of project's IRR? A. 4.03%, B 4.74%, C. 5.45%, $4.98%? If this is an independent project, the IRR method states that the firm should reject or accept project Delta? . If the project's cost of capital were to increase, how would that affect the IRR (the IRR would increase, not change, or decrease)?

Explanation / Answer

on using Hit and trial method ,we know at 4.74% ,The present value of cash flow =Initial investment.

so IRR = 4.74%

2) If WACC > IRR - Reject the project

   If WACC < IRR -accept the project.

In this case ,WACC(8%)> IRR (4.74%) ,REJECT THE PROJECT.

3)The project cost of capital has no effect on IRR.

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