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Category > Business & Finance Posted 19 May 2017 My Price 12.00

Blue Llama Mining Company

Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $750,000.

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 10%, 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 $350,000
Year 2 $475,000
Year 3 $400,000
Year 4 $475,000

Which of the following is the correct calculation of project Sigma's IRR?
a. 38.95%
b. 36.90%
c. 41.00%
d. 34.85%

If this is an independent project, the IRR method states that the firm should ______________.
a. reject project Sigma
b. accept project Sigma

If mutually exclusinve projects are propsed that both have an IRR greater than the necessary WACC, the IRR method states that the firm should accept:
a. The project with the greatest IRR, assuming that both projects have the same risk as the firm's average project
b. The project that requires the lowest initial investment, assuming that both projects have the same risk as the firm's average project
c. The project with the greater cash inflows, assuming that both projects have the same risk as the firm's average project

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Status NEW Posted 19 May 2017 04:05 AM My Price 12.00

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