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 $1,500,000. Falcon Freight has been basing capital budgeting decisions on a projects 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 Freights WACC is 10%, and project Delta has the same risk as the firms average project. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $350,000 Year 2 $475,000 Year 3 $400,000 Year 4 $475,000 Which of the following is the correct calculation of project Deltas IRR? 4.01% 5.01% 5.76% 4.76% If this is an independent project, the IRR method states that the firm should . If the projects cost of capital were to increase, how would that affect the IRR? The IRR would decrease. The IRR would not change. The IRR would increase.