2. Internal rate of return (IRR) 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 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 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: Cash Flow Year Year 1 Year 2 Year 3 $275,000 $400,000 $500,000 Year 4 $400,000 Which of the following is the correct calculation of project Delta's IRR? O 1.86% O 2.05% 2.14% 2.23% 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? O The IRR would not change. O The IRR would increase. O The IRR would decrease