4. 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: Falcon Freight is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,400,000. Falcon Freight 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. Falcon Freight's WACC is 9% 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 S300.000 Year 2 $425,000 $400,000 Year 3 Year 4 $425,000 Which of the following is the correct calculation of project Delta's IRR? 4.01% 0 4.81% O 3.81% O 3.61% this is an independent project, the IRR me states firm should If the project's cost of capital were to increase, how would that affect the IRR? O The IRR would not change. O The IRR would increase. O The IRR would decrease