Purple Whale Foodstuffs Inc. is evaluating a proposed capital budgeting project (project Sigma) that will require...

 

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Purple Whale Foodstuffs Inc. is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $850,000. 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 returns in percentage form are easier to understand and compare to required returns. Purple Whale Foodstuffs Inc.'s WACC is 9%, 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 Year 1 Year 2 Year 3 Year 4 Cash Flow $375,000 $500,000 $450,000 $475,000 Required Calculate Sigma's IRR? If the project cost of capital increase then how would it affect the IRR? Purple Whale Foodstuffs Inc. is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $850,000. 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 returns in percentage form are easier to understand and compare to required returns. Purple Whale Foodstuffs Inc.'s WACC is 9%, 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 Year 1 Year 2 Year 3 Year 4 Cash Flow $375,000 $500,000 $450,000 $475,000 Required Calculate Sigma's IRR? If the project cost of capital increase then how would it affect the IRR?

Answer rating: 100% (QA)

To calculate the IRR Internal Rate of Return for Project Sigma we need to find the discount rate at ... View the full answer