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:

Falcon Freight is evaluating a proposed capital budgeting project $($project Delta$)$ that will require an initial investment of $$1,600,000.$

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 $10\%,$ 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 $1$ $$375,000$

Year $2$ $$500,000$

Year $3$ $$450,000$

Year $4$ $$475,000$

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

$4\mathrm{.}74\%$

$5\mathrm{.}21\%$

$4\mathrm{.}03\%$

$4\mathrm{.}27\%$

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

If the project$$s cost of capital were to increase, how would that affect the IRR?

The IRR would increase.

The IRR would not change.

The IRR would decrease.