Question

Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,500,000. 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 percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company's WACC is 8%, and project Delta 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 $275,000 Year 2 $400,000 Year 3 Year 4 $500,000 $400,000 Which of the following is the correct calculation of project Delta's IRR? O 1.86% 01.77% O 2.14% 1.95% If this is an independent project, the IRR method states that the firm should

Answer 1

1.86%

The firm should reject the project.

IRR is the rate at which project's NPV is zero.If IRR is more than WACC, project is acceptable.
IRR is calculated as follows:
Year		Cash flow
0		$       -15,00,000
1		$           2,75,000
2		$           4,00,000
3		$           5,00,000
4		$           4,00,000
IRR	=	=irr(C6:C10)
	=	1.86%
Here, IRR is less than WACC.So, project is not acceptable.