4. Internal rate of return (IRR) Aa Aa The internal rate of return (IRR) refers to the compound annual rate of retum that a project generates based on its up-front cost and subsequent cash flows. Consider this case: Blue Moose Home Builders is evaluating a proposed capital budgeting projedt (project Delta) that will require an initial investment of$1,5DD,00D The company has been basing capital budgeting dedisions 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 retums are easier to understand and to compare to required retums. Blue Moose Home Builders's WACC is 10%, 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 Year 1 $325,000 Year 2 $450,ODD Year 3 $400,0DD Year 4 $475,0DD which of the following is the correct calculation of project Delta's IRR? 4.49% 3.74% 2.99% 3.93% If this is an independent project, the IRR method states that the firm should project Delta reje accept 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