4. Internal rate of return (IRR)The internal rate of return (IRR) .docx - 4 Internal rate of return(IRR The internal rate of return(IRR refers to the

# 4. Internal rate of return (IRR)The internal rate of return (IRR) .docx

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4. 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:Consider the following case:Blue Llama Mining Company is evaluating a proposed capitalbudgeting 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 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. Blue Llama Mining Companys WACC is 10%, and project Delta has thesame risk as the firms average project.The project is expected to generate the following net cash flows:YearCash FlowWhich of the following is the correct calculation of project Deltas IRR? 4.74%3.79%4.27%5.21%