5. Internal rate of return (IRR)

Whippet Industries Corp. is evaluating a proposed capital budgeting project that will require an initial investment of $1,200,000. The project is expected to generate the following net cash flows:

Year	Net Cash Flow
1	$275,000
2	$400,000
3	$450,000
4	$425,000

Whippet Industries Corp. has been basing capital budgeting decisions on a projects NPV; however, its new CFO wants to start using the internal rate of return (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. Whippet Industries Corp.s desired rate of return is 7%.

Which of the following is the IRR of the project?

5.80%

128.17%

7.00%

10.32%

11.32%

If this is an independent project, the IRR method states that the firm should the project.

If the projects desired rate of return decreased, how would that affect the IRR?

The IRR will decrease.

The IRR will increase.

The IRR will not change.