Blue Moose Home Builders is evaluating a proposed budgeting project (project Del

Question

Blue Moose Home Builders is evaluating a proposed budgeting project (project Delta) that will require an initial investment of $1,450,000. Blue Moose Home Builders 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 becuase percentages and returns are easier to understand and to compare to required returns. Blue Moose Home 's WACC is 7% and project Delta has the same risk as the firm's average project. The project is expected to generate the following net cash flows: (Year1) $325,000, (Year 2) $450,000, (Year 3) $425,000 and (Year 4) $450,000. Which of the following is the correct calculations of project Delta's IRR? 5.14%, 5.40%, 4.37% and 5.65%. (show work required).

If this is an independent project, the IRR methodstates that the firm should _________________

If the project's cost of capital were to increase, how would that affect the IRR? The IRR would increase, The IRR would not change, The IRR would decrease.

Explanation / Answer

Use IRR function in Excel

IRR = 5.14%

reject the project

The IRR would not change (since it does not depend on the cost of capital)

Cash flows Year      (1,450,000.00) 0         325,000.000 1         450,000.000 2         425,000.000 3         450,000.000 4

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