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 the case of Purple Whale Foodstuffs Inc.:

Purple Whale Foodstuffs Inc. is evaluating a proposed capital budgeting project $($project Sigma$)$ that will require an initial investment of $$800,000.$

Purple Whale Foodstuffs Inc. has been basing capital budgeting decisions on a project$$s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Purple Whale Foodstuffs Inc.$$s WACC is $7\%,$ 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 $1$ $$375,000$

Year $2$ $$500,000$

Year $3$ $$425,000$

Year $4$ $$500,000$

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

a$.40\mathrm{.}64\%$

b$.44\mathrm{.}70\%$

c$.46\mathrm{.}74\%$

d$.34\mathrm{.}54\%$ 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?

a$.$ The IRR would increase.

b$.$ The IRR would not change.

c$.$ The IRR would decrease.