Internal rate of return $($IRR$)$

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 Purple Whale Foodstuffs Inc.:

Consider the following case:

Purple Whale Foodstuffs Inc. is evaluating a proposed capital budgeting project $($project Sigma$)$ that will require an initial investment of $$900,000.$

Purple Whale Foodstuffs Inc. has been basing capital budgeting decisions on a project$$s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Purple Whale Foodstuffs Inc.$$s WACC is $9\%,$ and project Sigma has the same risk as the firm$$s average project.

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

Year

Cash Flow

Year $1$ $$325,000$

Year $2$ $$450,000$

Year $3$ $$425,000$

Year $4$ $$450,000$

Which of the following is the correct calculation of project Sigma$$s IRR?

a$.26\mathrm{.}53\%$

b$.27\mathrm{.}93\%$

c$.32\mathrm{.}12\%$

d$.30\mathrm{.}72\%$

If this is an independent project, the IRR method states that the firm shouldreject project Sigma $\_\_\_\_\_\_.$

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:

a$.$ the project with the greatest IRR, assuming that both projects have the same risk as the firm$$s average project.

b$.$ the project that requires the lowest initial investment, assuming that both projects have the same risk as the firm$$s average project.

c$.$ the project with the greater future cash inflows, assuming that both projects have the same risk as the firm$$s average project.