accept or reject project Sigma? for question 2

Purple Whale Foodstuffs Inc. is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $850,000. Purple Whale Foodstuffs Inc. has been basing capital budgeting decisions on a project's 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 returns in percentage form are easier to understand and compare to required returns. Purple Whale Foodstuffs Inc.'s WACC is 9%, and project Sigma has the same risk as the firm's average project. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 Year 2 $375,000 $500,000 $450,000 $475,000 Year 3 Year 4 Which of the following is the correct calculation of project Sigma's IRR? 44.40% 37.00% 42.55% 33.30% If this is an independent project, the IRR method states that the firm should accept project Sigma If the project's cost of capital were to increase, how would that affect the IRR? The IRR would not change. O The IRR would decrease. The IRR would increase