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 $$1,600,000.$

Blue Llama Mining Company has been basing capital budgeting decisions on a project$$s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company$$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: