he 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 the case of Blue Llama Mining Company:

Blue Llama Mining Company is evaluating a proposed capital budgeting project $($project Sigma$)$ that will require an initial investment of $$850,000.$

Blue Llama Mining Company has been basing capital budgeting decisions on a project$$s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Blue Llama Mining Company$$s WACC is $8\%,$ and project Sigma 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 $1$ $$300,000$

Year $2$ $$425,000$

Year $3$ $$400,000$

Year $4$ $$425,000$

Which of the following is the correct calculation of project Sigma$$s IRR?

$23\mathrm{.}40\%$

$26\mathrm{.}15\%$

$27\mathrm{.}53\%$

$33\mathrm{.}04\%$