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: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,400,000. 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 percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company’s WACC is 7%, and project Delta 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 $300,000 Year 2 $425,000 Year 3 $400,000 Year 4 $425,000   Q1. Which of the following is the correct calculation of project Delta’s IRR?   a. 3.21%   b. 3.61%   c. 4.01%   d. 3.41%     If this is an independent project, the IRR method states that the firm should Q2._____   Q3. If the project’s cost of capital were to increase, how would that affect the IRR?   a. The IRR would increase.   b. The IRR would decrease.   c. The IRR would not change.   Q1 and Q3. Options provided.  Q2. Option 1 Reject project delta or Option 1 Accept project delta

Siegel Industries is considering two capital budgeting projects.  Project A requires an initial investment of $48,000.  It is expected to produce net annual cash flows of $8,000.  Project B requires an initial investment of $75,000 and is expected to produce net annual cash flows of $12,000.  Using the cash payback technique to evaluate the two projects, Siegel should accept: A. Project A because it has a shorter cash payback period. B. Project B because it produces a larger net annual cash flow. C. Project B because it has a shorter cash payback period. D. Project A because it requires a smaller initial investment.

Your firm is evaluating a capital budgeting project. The estimated cash flows appear below. The board of directors wants to know the expected impact on shareholder wealth. Knowing that the estimated impact on shareholder wealth equates to net present value (NPV), you use your handy calculator to compute the value. What is the project's NPV? Assume that the cash flows occur at the end of each year. The discount rate (i.e., required rate of return, hurdle rate) is 17.5%. (Round to nearest penny) Year 0 cash flow -115,000 Year 1 cash flow 60,000 Year 2 cash flow 47,000 Year 3 cash flow 48,000 Year 4 cash flow 51,000 Year 5 cash flow 27,000

Falcon Freight is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,600,000. Falcon Freight 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. Falcon Freight’s WACC is 9%, and project Delta 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 $375,000 Year 2 $500,000 Year 3 $425,000 Year 4 $500,000 Which of the following is the correct calculation of project Delta’s IRR? 4.01% 5.19% 4.25% 4.72% If this is an independent project, the IRR method states that the firm should . If the project’s cost of capital were to increase, how would that affect the IRR? The IRR would increase.…

7. Fiftycent Inc., has hired you to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, S and T. The cash flows for each project are presented in the following table. Calculate the NPV and the annualized net present value (ANPV) in order to copy for each project using the firm's cost of capital of 9.0%. Which project would you recommend? (Click on the icon here the contents of the data table below into a spreadsheet.) Initial Investment Year 1 2 456 A WN 3 4 7 Project S $42,000 The NPV for project S is $ The NPV for project T is $ The ANPV for project S is $ The ANPV for project T is $ Which project would you recommend? The firm should choose project (1) - (1) OS OT $17,750 24,600 36,800 - Cash Inflows Project T $67,500 $26,400 22,600 37,000 19,700 10,900 15,350 9,780 (Round to the nearest cent.) (Round to the nearest cent.) 203 005 (Round to the nearest cent.) (Round to the nearest cent.) (Select from the drop-down menu.) bau bao otis…

The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Green Caterpillar Garden Supplies Inc.: Green Caterpillar Garden Supplies Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Alpha’s expected future cash flows. To answer this question, Green Caterpillar’s CFO has asked that you compute the project’s payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year.   Complete the following table and compute the project’s conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.)   Year 0 Year 1 Year 2 Year 3 Expected cash flow -$4,500,000…

Company is looking for opportunities to grow. Management is currently considering project proposals that will help expand the business. Several ventures were pre- screened and the team in-charge of evaluating proposals focused on two projects. The following data are given for two mutually exclusive project proposals: Project A Project B Initial Investment Annual Net Cash Inflows: Year 1 Year 2 Year 3 Year 4 Year 5 50,000.00 d) Internal Rate of Return e) Discounted Payback Period f) Profitability Index 15,000.00 14,000.00 12,000.00 12,000.00 12,000.00 60,000.00 30,000.00 14,000.00 10,000.00 10,000.00 10,000.00 Assuming that the firm's required rate of return is 20%, compute the following: a) Accounting Rate of Return b) Accounting Payback c) Net Present Value

Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $450,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $350,000 Year 2 $450,000 Year 3 $400,000 Year 4 $475,000 Hungry Whale Electronics's weighted average cost of capital is 7%, and project Alpha has the same risk as the firm's average project. Based on the cash flows, what is project Alpha's net present value (NPV)? $959,045 $1,309,045 $1,409,045 $1,150,854

The net present value (NPV) and internal rate of return (IRR) methods of investment analysis are interrelated and are sometimes used together to make capital budgeting decisions. Consider the case of Blue Hamster Manufacturing Inc.: Last Tuesday, Blue Hamster Manufacturing Inc. lost a portion of its planning and financial data when both its main and its backup servers crashed. The company’s CFO remembers that the internal rate of return (IRR) of Project Zeta is 11.3%, but he can’t recall how much Blue Hamster originally invested in the project nor the project’s net present value (NPV). However, he found a note that detailed the annual net cash flows expected to be generated by Project Zeta. They are: Year Cash Flow Year 1 $1,800,000 Year 2 $3,375,000 Year 3 $3,375,000 Year 4 $3,375,000   The CFO has asked you to compute Project Zeta’s initial investment using the information currently available to you. He has offered the following suggestions and observations:…

Several companies, including Barnyard and Energy Solutions Corporation, are considering project A, which is believed by all to have a level of risk that is equal to that of the average-risk project at Barnyard. Project A is a project that would require an initial investment of $78,000 and then produce an expected cash flow of $101,300 in 4 years. Project A has an internal rate of return of 7.65 percent. The weighted-average cost of capital for Barnyard is 10.92 percent and the weighted-average cost of capital for Energy Solutions Corporation is 5.21 percent. What is the NPV that Energy Solutions Corporation would compute for project A?   $-2568.40 (plus or minus $10)   $144922.17 (plus or minus $10)   $-11077.83 (plus or minus $10)   $4676.36 (plus or minus $10)   None of the above is within $10 of the correct answer