Consider this case: Suppose Cold Goose Metal Works Inc. is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $400,000. The project is expected to generate the following net cash flows: Cash Flow Year $350,000 Year 1 Year 2 $450,000 Year 3 $450,000 $400,000 Year 4 Cold Goose Metal Works Inc.'s weighted average cost of capital is 8%, and project Alpha has the same risk as the firm's average project. Based on the cash flows, what is project Alpha's net present value (NPV)? O $1,411,113 O $961,113 O $1,105,280 O $561,113 Making the accept or reject decision Cold Goose Metal Works Inc.'s decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should project Alpha. Which of the following statements best explains what it means when a project has an NPV of $0? When a project has an NPV of $0, the project is earning a rate of return less than the project's weighted average cost of capital. It's OK to accept the project, as long as the project's profit is positive. OWhen a project has an NPV of $0, the project is earning a rate of return equal to the project's weighted average cost of capital. It's OK to accept a project with an NPV of $0, because the project is earning the required minimum rate of return. OWhen a project has an NPV of $0, the project is earning a profit of $0. A firm should reject any project with an NPV of $0, because the project is not profitable. 2. Internal rate of return (IRR) Aa Aa The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider the case of Blue Llama Mining Company: Consider the following case: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. project's NPV; however, its new CFO Blue Llama Mining Company has been basing capital budgeting decisions on a wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because retuns in percentage form are easier to understand and compare to required returns. Blue Uama Mining Company's WACC is 7% , and project Sigma has the same risk as the firm's average project. The project is expected to generate the following net cash flows: Which of the following is the correct calculation of project Cash Flow Year Sigma's IRR? Year 1 $375,000 O 34.54% Year 2 $500,000 O 32.51% Year 3 $425,000 O 36.58% Year 4 $500,000 O 40.64 % If this is an independent project, the IRR method states that the firm should If mutually exclusive projects are proposed that both have an IRR greater than the necessary WACC, the IRR method states that the firm should accept: O The project with the greatest IRR, assuming that both projects have the same risk as the firm's average project O The project with the greater future cash inflows, assuming that both projects have the same risk as the firm's average project O The project that requires the lowest initial investment, assuming that both projects have the same risk as the firm's average project