Ch 11- Assignment - The Basics of Capital Budgeting

the annual net cash flows expected to be generated by Project Delts. They are:

Year

Year 1

Year 2

Year 3

Year 4

Cash Flow

$1,800,000

$3,375,000

$3,375,000

$3,375,000

The CFO has asked you to compute Project Delta's initial investment using the information currently available to you. He has offered the following

suggestions and observations:

A project's IRR represents the return the project would generate when its NPV is zero or the discounted value of its cash inflows

equals the discounted value of its cash outflows-when the cash flows are discounted using the project's IRR.

• The level of risk exhibited by Project Delta is the same as that exhibited by the company's average project, which means that Project

Delta's net cash flows can be discounted using Blue Hamster's 9% WACC

stay the same

increase

decrease

Given the data and

A project's I will

ta's initial investment in

if the project's cash inflows increase, and everything else is unaffected.

450,000

400,000

(rounded to the nearest whole dollar).

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4. Modified internal rate of return (MIRR)

The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the

reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption

other than the project's IRR.

Consider the following situation:

Grey Fox Aviation Company is analyzing a project that requires an initial investment of $600,000. The project's expected cash flows are:

Year

Cash Flow

Year 1

$325,000

Year 2

-125,000

Year 3