The internal rate of return (IRR) refers to the campeund annual rate of return that a projec generates based on its up-ront cost and subsequent cash flows. Consider the case af Free Spirit Industries Consider the following case: Free Spirit Industries is evaluating a proposed capital budgeting profect (project Sigma) that will require an initial investment of 900,000. Free Spirit Industries has been basing capital budgeting decisions on 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 farm are easier to uriderstand and compare to required returns. Free Spirit Industries's WACc is g%, and project Sigma has the same risk as the firm's average project. The project is expected to generate the following net cash flows: Which of the following is the correct calculation of project Sigma's IRR? Year Cash Flo ear 1 $300,000 Year 2 $425,000 Year 3 $475,000 Year4 $450,000 21.82% 27.27% 24.54% 23.18% If this is an independent project, the IRR method states that the firm should If mutually exdusive projects are proposed that both have an IRR greater than the necessary WACC, the IRR method states that the firm should accept: The project with the greatest IRR, assuming that both projects have the same risk as the firm's average O The praject that requires the lowest initial investment, assuming that both projeds have the same risk as the O The proaject with the greater future cash inflows, assuming that both projects have the same risk as the firm's project firm's average praject average project Search Windows