Question

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: Grey Fox Aviation Company is analyzing a project that requires an initial investment of $550,000. The project's expected cash flows are: Year Cash Flow Year 1 Year 2 Year 3 Year 4 $300,000 -100,000 450,000 450,000 Grey Fox Aviation Company's WACC is 9%, and the project has the same risk as the firm's average project. Calculate this project's modified internal rate of return (MIRR): 18.29% 21.34% O 22.35% O 20.32% O

Answer 1

Year CF 0 $ 1 $ 2 $ 3 $ 4 $ Year (550,000.00) O 300,000.00 1 (100,000.00) 2 450,000.00 3 450,000.00 4 20.32% MIRR ICF |-550000 300000 -100000 450000 450000 =MIRR(B2:B6,9%,9%) MIRR

Accept

The correct statement is statement 1