the internal rate of return (IRR) refers to the compound annual rate of return that a project

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 this case: Blue Ulama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,600,000 Blue Llama Mining Company 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 there is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company'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: Year Year 1 Year 2 Cash Flow $375,000 $500,000 $425,000 $500,000 Year 3 Year 4 Which of the following is the correct calculation of project Delta's IRR? 5.66% 4.489 4.72% 4.01% Which of the following is the correct calculation of project Delta's IRR? O 5.66% O 4.48% 04.72% 04.01% If this is an independent project, the IRR method states that the firm should If the project's cost of capital were to increase, how would that affect the IRR? O The IRR would decrease. The IRR would increase. The IRR would not change