Question

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: Fuzzy Button Clothing Company is analyzing a project that requires an initial investment of $3,225,000. The project's expected cash flows are: Cash Flow Year $325,000 Year 1 Year 2 -100,000 Year 3 475,000 Year 4 425,000 Fuzzy Button Clothing 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) 15.27% 21.56% 19.77% -20.38% If Fuzzy Button Clothing Company's managers select projects based on the MIRR criterion, they should this independent project Which of the following statements about the relationship between the IRR and the MIRR is correct? A typical firm's IRR will be less than its MIRR. A typical firm's IRR will be greater than its MIRR. A typical firm's IRR will be equal to its MIRR.

Answer 1

B7 fx =MIRR(B2:B6,0.07,0.07) 1 year Cash flows (32,25,000.00) 3,25,000.00 (1,00,000.00) 4,75,000.00 4,25,000.00 7 MIRR -20.38%|Do not Accept 8 9 IRR method assumes cashflows are reinvested at a rate of return equal to IRR 10 MIRR method assumes cashflows are reinvested at a rate of return equal to Cost of Capital 11 12 A typical Firms IRR will be greater than its MIRR