vlet/quiz2quiz action-takeQuiz&kquiz; probGuid-QNAPCOA801010000004194ee500600008

Question

vlet/quiz2quiz action-takeQuiz&kquiz; probGuid-QNAPCOA801010000004194ee500600008ctbk-Fan.He-00278ckem 1 Blue Pencil Publishing is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. Blue Pencil Publishing 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 Pencil Publishing's WACC is 8%, 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 Fl Year 1 $350,000 Year 2 $475,000 Year 3 $425,000 Year 4 $500,000 O 32.47% ? 38.20% ? 36.29% ? 30.56% If this is an independent project, the IRR method states that the firm should If mutually exclusive projects are proposed that both have an IRR greater than the necessary WACC, the IRR method states that the firm should accept: O The project that requires the lowest initial investment, assuming that both projects have the same risk as the firm's average project O The project with the greater future cash inflows, assuming that both projects have the same risk as the firm's average project O The project with the greatest IRR, assuming that both projects have the same risk as the firm's average

Explanation / Answer

IRR is the rate at which NPV is o, Assuming IRR to be 38.2031%, NPV come to 0, Hence IRR = 38.2031%

Particulars 0 1 2 3 4 NPV Cash flow -800000 350000 475000 425000 500000 PVIF @ 38.2031 1 0.723572771 0.523558 0.378832 0.274113 Present value -800000 253250.4698 248689.8 161003.6 137056.3 0

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