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 the case of Fuzzy Badger Transport Company: Consider the following case: Fuzzy Badger Transport Company is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. Fuzzy Badger Transport 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 returns in percentage form are easier to understand and compare to required returns. Fuzzy Badger Transport Company's WACC is 790, and project Sigma 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 Sigma's IRR? Year Cash Flo Year 1 $375,000 Year 2 $500,000 Year 3 $425,000 Year 4 $500,000 38.61% 40.64% 34.54% 32.51%