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Aplia: Student Question x s://courses.aplia.com/af/servlet/quiz?quiz actiona bookmarks here on the beokmarks bar. Import bookmarks now What Infomation Does1 X id-QNAPCOA8010100000041cdaaa00700008ctx-robert2-0039ackem 1529 The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its upfront cost and subsequent cash flows. Consider this case Consider the following case: Grey Fox Aviation Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,600,000 Grey Fox Aviation Compary 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 decisons. The CO says that the liRn bete metod because percentages and returns are easier to understand and to compare to required returns. Grey Fox Aviation 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 flaws which of the following is the correct calculation of project Delta's IRR? Year Cash Plow Year 1 $375,000 Year 2 $500,000 Year 3 $450,00O 5 21% 4 74% 559% if this is an independent project, the SR.R method states thst the frm shoukd If the project's cost of capital were to increase, how would that affect the IRR? The IRR would increase. O The IRR would not change. The IRR would decrease arch ek GROUND SHIPPING AS LOW AS 9.95 WEED

Explanation / Answer

1.To calculate the IRR we need to put the following values in the financial calculator:

CF0 = - $1,600,000

C01 = $375,000

F01 =1

C02 = $500,000

F02 = 1

C03 = $450,000

F03 = 1

C04 = $475,000

F04 = 1

Press IRR, then CPT, which gives 4.74%.

2. reject the project; as the wacc > irr.

3. the irr would not change; as wacc does not affect IRR calculation as it is not in the formula of IRR.

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