5. Internal Rate of Return (IRR) iz action-takeQuiz&uquiz.probGuid-ONAPCOA801010

Question

5. Internal Rate of Return (IRR)

iz action-takeQuiz&uquiz.probGuid-ONAPCOA801010000003af926e00700008kctx-mayest-00068uck; m 1 Consider the following case: alue Llama Mining company is evaluating a proposed capital budgeting project (project Delta) that will require an nitial investment of $1,400,000 Mining Company has been besing capital budgeting deasions on a project's NPV; however, its new cFo Blue ulama wants to start using the IRR method for capital budgeting deasins. The GO says that the iRR s a better method because percentages and retums are easier to understand and to compare to required retums. Blue Llama Min company's WACC is 9%. 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 De ta's IRR? Year Year 1 year 2 Year 3 Year 4 cash Flow $300,000 $425,000 $400,000 $425,000 o 3.41% o 4.21% 4.81% 0 4.01% 1f this is an independent project, the IRR method states that the firm should reject project Delta accept project Delt If the project's cost of capital were to increase, how would that affect the IRR The IRR would decrease. O The IRR would increase O The IRR would not change oM

Explanation / Answer

IRR is the rate of return or discount rate where the NPV is zero.

IRR can be calculated using excel or financial calculator:

= IRR(series of cash flows)

= IRR (-1400000,300000,425000,400000,425000)

= 4.01%

Hence option D is correct.

The IRR would not change if the WACC changes, IRR is independent of WACC since IRR depends only on cash flows and discount them at IRR to make NPV zero.

Only NPV gets impacted by WACC.

Hence option C is correct for part B

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