Aa E 2. Internal rate of return (IRR) Aa The internal rate of return TRR) 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: Purple Whale Foodstuffs Inc. is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,400,000. 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 percentages and returns are easier to understand and to compare to required returns. Purple Whale Foodstuffs Inc.'s WACC is 9%, 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 4.21% Year 2 $425,000 O 4.81% Year 3 $400,000 O 4.01% Year 4 $425,000 Q 3.81%