Answer Happy

Ch 11: Assignment - The Basics of Capital Budgeting 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 this case: Bhue llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,450,000 Blue Lama 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 Jama 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 $450,000 Year 3 $475,000 Year 4 $500,000 Which of the following is the correct calculation of project Delta's IRRY