2. Internal rate of return (IRR) Aa Aa The internal rate of return (RR) refers...
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2. Internal rate of return (IRR) Aa Aa The internal rate of return (RR) 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: Consider the following case: Blue Moose Home Builders is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,400,000. Blue Moose Home Builders 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 Moose Home Builders'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: Which of the following is the correct calculation of project Year Cash Flow Delta's IRR? Year 1 $300,000 O 4.41% Year 2 $425,000 O 4.81% Year 3 $400,000 O 4.01% Year 4 $425,000 O 3.41%
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