The internal rate of return (IRR) refers to the compound annual rate of return that a...

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Finance

The internal rate of return (IRR) refers to the compound annualrate of return that a project generates based on its up-front costand subsequent cash flows. Consider this case:
Falcon Freight is evaluating a proposed capital budgetingproject (project Delta) that will require an initial investment of$1,450,000. Falcon Freight 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 a better method because percentages and returns areeasier to understand and to compare to required returns. FalconFreight’s WACC is 9%, and project Delta has the same risk as thefirm’s average project.
The project is expected to generate the following net cashflows:
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 projectDelta’s IRR?
6.44%
6.13%
7.36%
4.90%
If this is an independent project, the IRR method states thatthe firm should ______
If the project’s cost of capital were to increase, how wouldthat affect the IRR?
The IRR would not change.
The IRR would decrease.
The IRR would increase.
there should be 3 answers

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If this is an Independent ProjectThe IRR See Answer

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The internal rate of return (IRR) refers to the compound annualrate of return that a project generates based on its up-front costand subsequent cash flows. Consider this case:Falcon Freight is evaluating a proposed capital budgetingproject (project Delta) that will require an initial investment of$1,450,000. Falcon Freight 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 a better method because percentages and returns areeasier to understand and to compare to required returns. FalconFreight’s WACC is 9%, and project Delta has the same risk as thefirm’s average project.The project is expected to generate the following net cashflows:Year Cash FlowYear 1 $275,000Year 2 $450,000Year 3 $475,000Year 4 $500,000Which of the following is the correct calculation of projectDelta’s IRR?6.44%6.13%7.36%4.90%If this is an independent project, the IRR method states thatthe firm should ______If the project’s cost of capital were to increase, how wouldthat affect the IRR?The IRR would not change.The IRR would decrease.The IRR would increase.there should be 3 answers