Purple Whale Foodstuffs Inc. is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $850,000. Purple Whale Foodstuffs Inc. 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. Purple Whale Foodstuffs Inc.'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 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 Sigma's IRR? 28.19% O 32.22% 29.54% O 26.85%

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Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Purple Whale Foodstuffs Inc. is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $850,000. Purple Whale Foodstuffs Inc. 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. Purple Whale Foodstuffs Inc.'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: \table[[Year,Cash Flow],[Year 1,$275,000
 
Purple Whale Foodstuffs Inc. is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of
$850,000.
Purple Whale Foodstuffs Inc. 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. Purple Whale Foodstuffs Inc.'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
Year 1
Cash Flow
$275,000
Year 2
$400,000
Year 3
$450,000
Year 4
$425,000
Which of the following is the correct calculation of project Sigma's IRR?
O 28.19%
O 32.22%
O 29.54%
O 26.85%
Transcribed Image Text:Purple Whale Foodstuffs Inc. is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $850,000. Purple Whale Foodstuffs Inc. 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. Purple Whale Foodstuffs Inc.'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 Year 1 Cash Flow $275,000 Year 2 $400,000 Year 3 $450,000 Year 4 $425,000 Which of the following is the correct calculation of project Sigma's IRR? O 28.19% O 32.22% O 29.54% O 26.85%
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