Purple Whale Foodstuffs Inc. is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,450,000.

Purple Whale Foodstuffs Inc. 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 percentages and returns are easier to understand and to compare to required returns. Purple Whale Foodstuffs Inc.s WACC is 10%, and project Delta 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	$275,000
Year 2	$400,000
Year 3	$450,000
Year 4	$425,000

Which of the following is the correct calculation of project Deltas IRR?

a) 2.17%

b) 2.04%

c) 2.55%

d) 2.42%

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

If the projects cost of capital were to increase, how would that affect the IRR?

a) The IRR would not change.

b) The IRR would increase.

c) The IRR would decrease.