3. 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: Purple Whale Foodstuffs Inc. is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,600,000. Purple Whale Foodstuffs Inc. 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. Purple Whale Foodstuffs Inc.'s WACC is 7%, 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 Cash Flow $375,000 Year 1 $500,000 Year 2 Year 3 $450,000 $475,000 Year 4 Which of the following is the correct calculation of project Delta's IRR? 4.98% 4.74% 4.50% 3.79% 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. The IRR would not change. The IRR would decrease