Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,450,000.

Blue Llama Mining Company 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. Blue Llama Mining Companys WACC is 8%, and project Delta has the same risk as the firms average project.

The project is expected to generate the following net cash flows:

Year 1-$275,000

Year 2-$400,000

Year 3-$450,000

Year 4-$425,000

1. Which of the following is the correct calculation of project Deltas IRR?

A. 2.68%

B. 2.81%

C. 2.55%

D. 2.93%

2. If this is an independent project, the IRR method states that the firm should Accept or Reject

3. If the projects cost of capital were to increase, how would that affect the IRR?

A. The IRR would decrease.

B. The IRR would increase.

C. The IRR would not change.