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: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,450,000. The company 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. Blue Llama Mining Company'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 Year 1 Year 2 $275,000 $400,000 $450,000 $425,000 Year 3 Year 4 Which of the following is the correct calculation of project Delta's IRR? 2.42% O 2.93% O 2.55% 0 2.68% If this is an independent project, the IRR method states that the firm should project Delta. If the project's cost of capital were to increase, how would that affect the IRR? O The IRR would not change. The IRR would increase. O The IRR would decrease