Question

Cold Goose Metal Works Inc. is analyzing a project that requires an initial investment of $2,225,000. The project’s expected cash flows are:

Year	Cash Flow
Year 1	$375,000
Year 2	–200,000
Year 3	450,000
Year 4	500,000

Cold Goose Metal Works Inc.’s WACC is 10%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR):

33.01%

22.01%

-11.08%

24.76%

If Cold Goose Metal Works Inc.’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 equal to its MIRR.

A typical firm’s IRR will be less than its MIRR.

A typical firm’s IRR will be greater than its MIRR.

Answer 1

B36 X V f =MIRR(B30:B34,10%,10%) C D E F A Year 0 29 30 31 32 B Cashflows $ (2,225,000) 1 $ 375,000 2 $ (200,000) 3 $ 450,000 4 $ 500,000 36 MIRR -11.08% 37 38 Project should be rejected. 39 40 A typical firms IRR will be less than the its MIRR

Function Arguments ? x MIRR Values B30:B34 10% Finance_rate Reinvest_rate 1 1 1 = (-2225000;375000:-200000;450000;500000} = 0.1 = 0.1 10%| = -0.110831399 Returns the internal rate of return for a series of periodic cash flows, considering both cost of investment and interest on reinvestment of cash. Reinvest rate is the interest rate you receive on the cash flows as you reinvest them. Formula result = -11.08% Help on this function ок | Cancel

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