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

Cute Camel woodcraft Company is analyzing a project that requires an Initial investment of $3,000,000 The project's expected cash flows are:

Year Cash Flow

Year 1 $325,000

Year 2 $175,000

Year 3 $450,000

Year 4 $450,000

Cute Camel Woodcraft company's WACC is 7%, and the project has the same risk as the firms average project. Calculate this projects modified internal rate of return

if Cute Camel Woodcraft Company's managers select projects based on the MIRR criterion, they should (reject/accept) this independent project.

Which of the statements about the relationship between the IRR and the MIRR is correct?

A typical firm's will be greater than its MIRR

A typical firm's IRR will be less than its MIRR

A typical firm's IRR will be equal to its MIRR

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: Cute Camel Woodcraft Company is analyzing a project that requires an initial investment of $3,000,000. The project's expected cash flows are: Year Year Cash Flow $325,000 -175,000 Year 2 Year 3 450,000 450,000 Year 4 Cute Camel Woodcraft Company's WACC is 7%, and the project has the same risk as the firm's average project. Calculate this project's modified Internal rate of return (MIRR): 0 -19.41% O 19.87% 14.69% 20.7496 if Cute Camel Woodcraft Company's managers select projects based on the MIRR criterion, they should this independent projectes Which of the following statements about the relationship between the IRR and the MIRR is correct? reject accept O A typical firm's TRR will be greater than its MIRR A typical firm's IRR will be less than its MIRR A typical firm's IRR will be equal to its MIRR