Question
Blue Pencil Publishing is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $750,000. Blue Pencil Publishing has been
Blue Pencil Publishing is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $750,000.
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 10%, and project Sigma has the same risk as the firms average project.
The project is expected to generate the following net cash flows:
Year | Cash Flow |
---|---|
Year 1 | $350,000 |
Year 2 | $475,000 |
Year 3 | $400,000 |
Year 4 | $475,000 |
Which of the following is the correct calculation of project Sigmas IRR?
32.80%
41.00%
47.15%
36.90%
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