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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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