2. Internal rate of return (IRR)The internal rate of return (IRR) .docx - 2 Internal rate of return(IRR The internal rate of return(IRR refers to the

# 2. Internal rate of return (IRR)The internal rate of return (IRR) .docx

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2. Internal rate of return (IRR) The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up- front cost and subsequent cash flows. Consider the case of Blue Llama Mining Company: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of \$900,000. Blue Llama Mining Company 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. Blue Llama

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Unformatted text preview: Mining Company 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: Year Cash Flow Which of the following is the correct calculation of project Sigma s IRR? � 23.18% 27.27% 24.54% 30.00% If this is an independent project, the IRR method states 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. Year Cash FlowYear 1\$300,000Year 2\$425,000Year 3\$475,000Year 4\$450,000...
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• Fall '17
• Bob Maxwell

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