Q2: Based on lecture 10 Part 2, consider a Private Equity Fund, PEF Inc that has the following cash flow:

Year 1: Investment in Project A at -$17.341 million

Year 2: Investment in Project B at -$7.829 million and inflow of income from Project A at $1.994 million.

Year 3: Investment in Project C at -19.930 million and inflows of income from Project A at $2.124 million and from project B at $1.174 million.

Years 4-5: Each year, we have cash inflows from Project A at 10% of the investment allocation, Project B at 11.5% of the investment allocation and Project C at 0% of the investment allocation.

Year 6: Cash inflow from Project A at 10% of the investment allocation, Project B cash inflow at 5% of the investment allocation and disposal of Project C for $23.750 million.

Year 7: Cash inflow from Project A at 10% of the investment allocation, Project B at 7.5% of the investment allocation.

Year 8: Cash inflow from Project A at 10% of the investment allocation and cash proceeds from disposal of Project B for $10.310 million.

Year 9: Cash inflow from Project A at 10% of the investment allocation.

Year 10: Proceeds from sale of Project A for $25.792 million.

Assume that all cashflows are distributed in year received.

A) Calculate the expected IRR

B) Assuming cost of capital at 6% and reinvestment rate of 9%, calculate modified IRR.

C) What do the two values tell us about expected performance of the PEF over the next 10 years?