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 Pencil Publishing Is evaluating a proposed capital budgeting groject (project Delta) that will require an initial Investment of $1,400,000 Blue Pencil Publishing 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 Pencil Publishing'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 $300,000 $425,000 $400,000 $425,000 Year 3 Year 4 Which of the following is the correct calculation of project Delta's IRR? 4.81% 3.41% Year 2 $425,000 Year 3 $400,000 $425,000 Year 4 Which of the following is the correct calculation of project Delta's IRR? O 4.81% 3.41% 4.01% 4.21% 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 IRF reject project Delta The IRR would increase. accept project Delta The IRR would decrease. The IRR would not change