Ziff Corp. is evaluating a proposed capital budgeting projet that will require a

Question

Ziff Corp. is evaluating a proposed capital budgeting projet that will require an initial investment of $1,550,000. The project is expected to generate the following net cash flows:

Year 1         $275,000

Year 2         $450,000

Year 3         $475,000

Year 4         $500,000

Ziff Corp has been basing capital budgeting decisions on a project's NPV; however its new CFO wants to start using the internal rate of return (IRR) method for capital budgeting decsions. The CFO says that the IRR is a better method, because percentages and returns are easier to understand and compare to required returns. Ziff Corp's WACC is 6%.

1. What is the IRR?

2. If this is an independent project, the IRR method states that the firm should ____________ (accept or reject) the project.

3. If the project's WACC decreased, how would that affect the IRR? (Decrease, Increase or Will Not Change)

Explanation / Answer

The cash flows are :

so the IRR is : 3.5 %

2. The project should be rejected

3. Will not change..

-1550000.0000 year 0 275000.0000 year 1 450000.0000 year 2 475000.0000 year 3 500000.0000 year 4

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