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 the case of Blue Llama Mining Company: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. Blue Lama 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 returns in percentage formare easier to understand and compare to required returns. Blue Llama Mining Company's WACC is 7%, and project Sigma has the same risk as the firm's average project. The project is expected to generate the following net cash flows: Year Cash Flow $275,000 Year 1 Year 2 Year 3 Year 4 $400,000 $500,000 $400,000 Which of the following is the correct calculation of project Sigma's IRR? 0 27.98% O 31.09% 0 24.87% 0 37.31% 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