2. Internal rate of return (IRR) Aa Aa 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: Consider the following case: Falcon Freight is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,600,000 Falcon Freight 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. Falcon Freight'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 Delta's IRR? Year Cash Flow Year $350,000 Year 2 $475,000 Year 3 $425,000 Year 4 $500,000 O 4.22% O 2.99% 3.3490 3.52%