Grey Fox Aviation Company is evaluating a proposed capital budgeting project tha
ID: 2799868 • Letter: G
Question
Grey Fox Aviation Company is evaluating a proposed capital budgeting project that will require an initial investment of $1,450,000. Grey Fox Aviation has been basing capital budgeting decisions on a projects 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 percentages and returns are easier to understand and to compare to required returns. Grey Fox Aviation 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 Deltas IRR?
A. 5.14%
B. 4.63%
C.5.65%
D.5.40%
If this is an independent project, the IRR method states that the firm should accept or reject project Delta?
If the projects cost of capital were to increase how would that affect the IRR?
a. the irr would not change
b.the irr would increase
c. the irr would decrease
YEAR CASH FLOW YEAR 1 $325,000 YEAR 2 $450,000 YEAR 3 $425,000 YEAR 4 $450,000Explanation / Answer
Calculated in excel
IRR = IRR({-1450000,325000,450000,425000,450000})
IRR = 5.14%
Option A
b)
reject because IRR is lower than WACC
c)
Option A
IRR dont depend on the cost of capital
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