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Fuzzy Badger Transport Company is evaluating a proposedcapital budgeting (project Delta) that will require an initialinvestment of $1,400,000.
Fuzzy Badger Transport Company has been basing capital budgetingdecisions on a project’s NPV; however, its new CFO wants to startusing the IRR method for capital budgeting decisions. The CFO saysthat the IRR is better method because percentages and returns areeasier to understand and to compare to required returns. FuzzyBadger Transport Company’s WACC is 10% and project Delta has thesame risk as the firm’s average project.
The project is expected to generate the following net cashflows:
Year |
Cash Flow |
Year 1 |
$300,000 |
Year 2 |
$425,000 |
Year 3 |
$400,000 |
Year 4 |
$425,000 |
Which of the following is the correct calculation of projectDelta’s IRR?
a. 4.01%
b. 4.41%
c. 3.21%
d. 4.81%
2. If this is an independent project, the IRR method states thatthe firm should _____
a. Reject project Delta
b. Accept project Delta
3. If the project’s cost of capital were to increase, how wouldthat affect the IRR?
a. The IRR would decrease
b.The IRR would not change
c. The IRR would increase
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