11. 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: proposed capital budgeting project (project Delta) that will require an initial investment of Blue Llama Mining Company is evaluating $1,500,000. 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 the IRR 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 10%, 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 Cash Flow Year 1 Year 2 Year 3 $300,000 $425,000 $475,000 $450,000 Year 4 Which of the following is the correct calculation of project Delta's IRR? O 3.32% O 3.69% O 4.43% O 3.87% 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 increase. O The IRR would decrease. The IRR would not change