#2 Basics of Capital Budgeting

The internal rate of retum (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash fows. Consider the case of Blue Llama Mining Company: Blue Lama Mining Company is evaluating a proposed capital budpeting project (project Sigma) that will require an initial imvestment of $800,000. EVive Lama Mining Company has been basing capital budgeting decisions on a project's NPV; however, its new CFO warts 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 retums. Bue Lama Mining Company'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? 32.47%36.29%38.20%45.84% If this is an independent project, the tRe method states that the firm should If the project's cost of capital were to increase, now would that affect the tar? The 1RR would decrease. The IRR would not change. The IRR would increase: The internal rate of retum (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash fows. Consider the case of Blue Llama Mining Company: Blue Lama Mining Company is evaluating a proposed capital budpeting project (project Sigma) that will require an initial imvestment of $800,000. EVive Lama Mining Company has been basing capital budgeting decisions on a project's NPV; however, its new CFO warts 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 retums. Bue Lama Mining Company'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? 32.47%36.29%38.20%45.84% If this is an independent project, the tRe method states that the firm should If the project's cost of capital were to increase, now would that affect the tar? The 1RR would decrease. The IRR would not change. The IRR would increase