marks Window Help courses.aplia.com Blue Pencil Publishing is evaluating a propo
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marks Window Help courses.aplia.com Blue Pencil Publishing is evaluating a proposed capital budgeting project (project Delta) that will require an initlal investment of $1,500,000. Blue Pencil Publishing has been basing capital budgeting decisions on a project's NPV; however, its new co wants to start using the IRR method for capital budgeting decisions. The CFO says that the RR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Pencil Publishing'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 flows: Which of the following is the correct calculation of project Delta's IRR? Year Cash Flow Year 1 $300,000 Year 2 $425,000 Year 3 $475,000 Year 4 $450,000 4.24% 2.95% 3.69% 3.32% If this is an independent project, the IRR method states that the firm should accept project Delta reject project Delta If the project's cost of capital were to increase, how would that affect the IRR? O The IRR would increase. O The IRR would decrease. O The IRR would not change. lash Player MAC 29,0.0.113 2004-2016 Apa All rights reserved 13 Cengags Learning esceps as noted Al rigets reserved Grade It Now Save & Continue MacBook ProExplanation / Answer
NPV at 3% Year Cashflows PVF @ 3% Present values 0 -1,500,000 1 -1500000 1 300,000 0.970874 291262.14 2 425,000 0.942596 400603.26 3 475,000 0.915142 434692.29 4 450,000 0.888487 399819.17 NPV at 3% 26,377 NPV at 4% Year Cashflows PVF @ 4% Present values 0 -1,500,000 1 -1500000 1 300,000 0.961538 288461.54 2 425,000 0.924556 392936.39 3 475,000 0.888996 422273.27 4 450,000 0.854804 384661.89 NPV at 4% -11,667 IRR = Lower rate + (NPV at lowewr rate/ Difference in NPV) *Diff. in rates 3% + (26377 /38044)*1% = 3.69% Req 1: IRR is 3.69% Req 2: Reject Pproject Delta Req 3: IRR would not change
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