ziff corp is evaluating a proposed capital budgeting project that will require a
ID: 2651663 • Letter: Z
Question
ziff corp is evaluating a proposed capital budgeting project that will require an initial investment of $1,350,000 the projectis expecting to generate the following net cash flows
Year 1=$300,000
Year 2=$425,000
Year 3=$400,000
Year 4=$425,000
Ziff corp has been basing capital budgeting decisions on a projects NPV, however, its now CFO wants to start using the international rate ofreturn(IRR) methodfor capital budgeting decisions. The CFOsays that the IRR is a better method, because percentages and returns are easier to understand and to compare to required returns. Ziff Corp.'s WACC is 8%
What is the IRR ofthe project?
If the projects WACC increased how would that affect the IRR?
Explanation / Answer
Answer;
Calculation of IRR of the project :
Year
Cash Flows
0
-1350000
1
300000
2
425000
3
400000
4
425000
IRR =
5.50%
IRR of the project is not affected by change in WACC. Hence it will remain same.
Calculation of IRR of the project :
Year
Cash Flows
0
-1350000
1
300000
2
425000
3
400000
4
425000
IRR =
5.50%
IRR of the project is not affected by change in WACC. Hence it will remain same.
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