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2. Internal rate of return (IRr) Aa Aa The internal rate of return (IRR) refers...

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2. Internal rate of return (IRr) Aa Aa 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: Consider the following case: Purple Whale Foodstuffs Inc. is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,500,000 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 percentages and returns are easier to understand and to compare to required returns. Purple Whale Foodstuffs Inc.'s WACC is 10%, and project Delta has the same risk as the firm's average project The project is expected to generate the following net cash flows: Which of the following is the correct calculation of project Cash Flow Year Delta's IRR? Year 1 $350,000 6.01% $475,000 Year 2 5.51% $400,000 Year 3 5.26% $475,000 Year 4 5.01%

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