Internal Rate of Return (IRR)

Transcenter Consortium Corp is evaluating a proposed capital budgeting project that will require an initial investment of $1,300,000. The project is expected to generate the following net cash flows:

Year 1	$275K
Year 2	$400K
Year 3	$500K
Year 4	$400K

Transcenter Consortium Corp. has been basing capital budgeting decisions on a projects NPV; however, its new CFO wants to start using the internal rate of revenue (IRR) method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages & returns are easier to understand & to compare to required returns.

1. Transcenter Consortium Corp. WACC is 7%. Which of the following is the IRR of the project?

A. 21.15%

B. 8.63%

C. 7%

D. 5.80%

E. 7.63%

2. If this is an independent project, the IRR method states that the firm should _______ the project.

A. Accept

B. Reject

3. If the projects WACC decreased, how would that affect the IRR?

A. Increase

B. Decrease

C. Not change