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 Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,600,000. Blue Llama Mining Company has been basing capital budgeting decisions on a projects 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 Llama Mining Companys WACC is 8%, and project Delta has the same risk as the firms average project. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $500,000 Year 3 $450,000 Year 4 $475,000 Which of the following is the correct calculation of project Deltas IRR? 5.45% 5.69% 4.74% 4.50% If this is an independent project, the IRR method states that the firm should . If the projects cost of capital were to increase, how would that affect the IRR? The IRR would increase. The IRR would decrease. The IRR would not change.