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: Consider the following case Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $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 LlMining Company'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 Year 1 $275,000 Year 2 $400,000 Year 3 $500,000 Year4 $400,000 1.8696 0 2.05% o 1.67% O 1.77% If this is an independent project, the IRR method states that the fim should If the project's cost of capital were to increase, how would that affect the IRR? O The IRR would not change O The IRR would increase. O The IRR would decrease