2. Internal rate of return (IRR) The internal rate of retum (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cast flows. Consider this case: Blue Uama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an inilial investment of $1,500,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project's NPV; howevec, its new Cro 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 Lama Mining Company's WACC is aw, and project Deita 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 Deita's IRR? 1.86% 1.77% 205% 2.23% 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? The IRR would increase: The IRR would decrease. The IRR would not change