Warr Company Is Considering a Project That Has the Following

question 38

Short Answer

Warr Company is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC or negative, in both cases it will be rejected. $\begin{array}{c}\begin{array}{lll} \text {Year}\\\text {Cash flows}\end{array}\begin{array}{lll} 0 \\\hline -\$1,050\end{array}\begin{array}{lll}1 \\\hline \$400\end{array}\begin{array}{lll}2 \\\hline \$400\end{array}\begin{array}{lll}3 \\\hline \$400\end{array}\begin{array}{lll}4 \\\hline \$400\end{array}\end{array}$

a. $14.05 \%$
b. $15.61 \%$
c. $17.34 \%$
d. $19.27 \%$
e. $21.20 \%$

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Definitions:

Debt/Equity Ratio

An indicator of how the financing of company assets is divided between shareholder equity and debt.

All-Equity Firm

A company that finances its operations without any debt, relying solely on shareholder equity for funding.

Stock Price

The cost of purchasing a single share of a company, which fluctuates based on market conditions.

Redeeming Shares

The process of returning an investment by selling the shares back to the issuer for cash.