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Please circle answer 2. Internal rate of return (IRR) The internal rate of return (IRR) refers to the compound annual rate of return that a
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2. 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 Blue Llama Mining Company: Blue Llama Mining Company is evaluating a proposed capital budgeting project project Sigma) that will require an initial investment of $850,000 Blue Llama Mining Company 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 formare easier to understand and compare to required returns. Blue Llama Mining Company's WACC is 8%, 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 Year 1 Year 2 Cash Flow 5275,000 $400,000 $450,000 $425,000 Year 3 Year 4 Ch 11: Assignment- The Basics of Capital Budgeting The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $275,000 Year 2 Year 3 $400,000 $450,000 $425,000 Year 4 Which of the following is the correct calculation of project Sigma's IRR? O 21.48% O 29.5496 O 22.82% 0 26.85% If this is an independent project, the IRR method states that the firm should If the project's cost of capital were to increase, how would that affect the IRR? O The IRR would decrease. The IRR would not change. The IRR would increase Step by Step Solution
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