Free Spirit Industries is evaluating a proposed capital budgeting project (proje

Question

Free Spirit Industries is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $850,000 Free Spirit Industries 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 because returns in percentage form are easier to understand and compare to required returns. Free Spirit Industries's WACC is 9%, and project Sigma has the same risk as the firm's average project. The project is expected to generate the following net cash flows Which of the following is the correct calculation of project Sigma's IRR? Year Cash Flow Year $375,000 Year 2 $500,000 Year 3 $450,000 Year 4 $475,000 O 31.45% o 37.00% O 29.60% O 33.30%

Explanation / Answer

IRR of the project = 37.00%

accept the project

The project with the greatest IRR assuming that boht projects have the same risk as the firms average project

Cash flows Year        (850,000.00) 0          375,000.00 1          500,000.00 2          450,000.00 3          475,000.00 4

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