Blue Pencil Publishing is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $850,000.

Blue Pencil Publishing 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 returns in percentage form are easier to understand and compare to required returns. Blue Pencil Publishings WACC is 8%, and project Sigma has the same risk as the firms average project.

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

A. Which of the following is the correct calculation of project Sigmas IRR?

26.85%

28.19%

32.22%

30.88%

B. If this is an independent project, the IRR method states that the firm should (reject or accept)

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

The IRR would increase.

The IRR would decrease.

The IRR would not change.