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 o 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 $1,450,000. 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 Delta's IRR? Year Cash Flow Year 1 $325,000 Year 2 $450,000 Year 3 $425,000 Year 4 $450,000 o 5.65% o 6.17% 4.37% o 5.14% 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 not change. O The IRR would decrease