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Ch 10: Assignment - The Basics of Capital Budgeting. Evaluating Cash Flows The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-tront cost and subsequent cash flows. Consider the case of Blue Cama Mining Company: Consider the following case: Blue Lama 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 boting capital budgeting decisions on a project's NPV; however, its new co 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 ore easier to understand and compare to required returns. Blue Llama Mining Company's WAOC is 9%, and project Sigma has the same risk as the firm's average project The project expected to generate the following net cash flows Year Cash Flow Your Year 2 Year $375,000 $500,000 $450,000 $475,000 Year 3 OLM Ch 10: Assignment - The Basics of Capital Budgeting: Evaluating Cash Flows - Which of the following is the correct calculation of project Sigma's IRR? O 38.85% 10.70% O 44.40% 0 37.00% If this is an independent project, the IRR method states that the firm should If mutually exclusive projects are proposed that both have an IRR greater than the necessary ACC, the IRR method states that the firm should accepit: O the project with the greater future coshinows, asurning that both projects have the same rink on the firm' average project o the project that requires the lowest initial investment, assuming that both projects have the same tik as the 's average project the project with the greatest IRR, assuming that both projects have the same risk as the firmy average project Grade R Now Save & Continue Continue without saving