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% 25.51% 26.85% 22.82%
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% 25.51% 26.85% 22.82%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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 the case of Blue Llama
Mining Company:
Blue Llama Mining Company is
evaluating a proposed capital
budgeting project (project Sigma) that
will require an initial investment of
$850,000.
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 returns in percentage
form are easier to understand and
compare to required returns. Blue
Llama Mining Company's WACC is 8%,
and project Sigma has the same risk as
the firm's average project.
Transcribed Image Text: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%
25.51%
26.85%
22.82%
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