Falcon Freight is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000.

Falcon Freight has been basing capital budgeting decisions on a projects 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 returns in percentage form are easier to understand and compare to required returns. Falcon Freights WACC is 8%, and project Sigma has the same risk as the firms average project.

The project is expected to generate the following net cash flows:

Year	Cash Flow
Year 1	$350,000
Year 2	$475,000
Year 3	$425,000
Year 4	$500,000

Which of the following is the correct calculation of project Sigmas IRR?

40.11%

32.47%

42.02%

38.20%

If this is an independent project, the IRR method states that the firm should .

If the projects 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.