4. Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project's IRR. Consider the following situation: Cold Goose Metal Works Inc. is analyzing a project that requires an initial investment of $2,500,000. The project's expected cash flows Year Year 1 Year 2 Year 3 Year 4 Cash Flow $350.000 -100,000 475,000 500.000 Cold Goose Metal Works Inc. 'S WACCI, and the project has the same riskas rate of return (MIRR): he firm's average project. Calculate this project's modified internal 13.414 25.526 50% Cold Goose Metal Works Inc. is analyzing a project that requires an initial investment of $2,500,000. The project's expected cash flows are: Year Cash Flow Year 1 Year 2 $350,000 -100,000 475,000 500,000 Year 3 Year 4 Cold Goose Metal Works Inc.'s WACC is 8%, and the project has the same risk as the firm's average project. Calculate this project's modified internal rate of return (MIRR): -13.41% 29.77% 25.52% 32.60% If Cold Goose Metal Works Inc.'s managers select projects based on the MERR criterion, they should Which of the following statements about the relationship between the IRR and the MIRR is correct? reje A typical firm's IRR will be greater than its MIRR. accept A typical firm's IRR will be less than its MIRR. A typical firm's IRR will be equal to its MIRR. 5. NPV profiles An NPV profile plots a project's NPV at various costs of capital, labeled "A" and "B" in the graph. A project's NPV profile is shown as follows. Identify the range of costs (ranges labeled "A" and "B") of capital that a firm would use to accept and reject this project. NPV Dollars 200 2 6 10 12 14 16 18 20 COST OF CAPITAL Percent This NPV profile demonstrates that as the cost of capital increases, the project's NPV