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: Green Caterpillar Garden Supplies Inc. is analyzing a project that requires an initial investment of $500,000. The project's expected cash flows are: Year Cash Flow Year 1 $375,000 Year 2 -200,000 Year 3 425,000 Year 4 450,000 Green Caterpillar Garden Supplies 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): O 20.80% O 23.92% O 17.68% O 21.84%

Answer 1

B8 for =MIRR(B3:37,0.1,0.1) ㄴ A B C D E F G H 1 2 year 3 4 5 Cash flows 0 $ (500,000.00) 1 $ 375,000.00 2 $ (200,000.00) 3 $ 425,000.00 4 $ 450,000.00 20.80% 6 7 8 MIRR 9 10 Accept this Independent Project 11 12 IRR calculation assumes that the rate at which cash flows can be reinvested at a rate of return equal to the IRR 13 MIRR method assumes that cash flows are reinvested at the rate of return equal to the cost of capital 14