Question
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
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. Sacramone Products Co. is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. Sacramone Products Co. 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. Sacramone Products Co.'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 Cash Flow 1 $425,000 2 $500,000 3 $350,000 4 $475,000 Which of the following is the correct calculation of project Sigma's IRR? a. 32.47% b. 36.29% c. 38.20% d. 40.83%.
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