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(Solved): 1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) ru ...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Lumbering Ox Truckmakers is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $550,000. The project is expected to generate the following net cash flows:
2. Internal rate of return (IRR) 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 the case of Blue Uama Mining Cornpany: Blue Lama Mining Company is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. Blue Lama Mining Company has been basing capital budgeting decisions on a projoct'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 7\%, and project Sigma has the same risk as the firm's average prolect.
Which of the following is the correct calculation of project Sigma's IRR? 35.75%31.09%34.20%37.31% If this is an independent project, the IRR method states that the firm shou If the project's cost of capital were to increase, how would that affect the The IRR would increase. The IRR would decrease. The IRR would not change.