### 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 $3,225,000. The project’s expected cash flows are:| Year | Cash Flow ||--------|---------------|| Year 1 | $325,000 || Year 2 | –150,000 || Year 3 | 450,000 || Year 4 | 475,000 |Grey Fox Aviation Company’s WACC (Weighted Average Cost of Capital) is 8%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR):- [ ] 16.25%- [ ] 13.69%- [ ] 14.54%- [ ] –20.05%If Grey Fox Aviation 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 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.### Detailed Explanation of Graphs/DiagramsCurrently, there are no graphs or diagrams provided in this content. The text consists of a problem description related to the calculation of the Modified Internal Rate of Return (MIRR) for a project. The given data includes cash flow estimates over four years for a specific investment project of Grey Fox Aviation Company, along with the company’s Weighted Average Cost of Capital (WACC).To solve the problem, one would typically apply the MIRR formula, considering both the cost of capital and the reinvestment of cash flows at the WACC, to derive the project's MIRR.

MIRR refers to modified internal rate of return. MIRR, as a capital budgeting tool, seeks to remove…

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 $3,225,000. The project's expected cash flows are: Year Cash Flow Year 1 $325,000

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 $3,225,000. The project's expected cash flows are: Year Cash Flow Year 1 $325,000

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The management of SoComfy Hotel wishes to capitalize on an investment project that will cost the management to pay $85,000 as an initial cost. This project will take three years to finish with the net cash flows stream of $18,000 for the first year, $21,000 for the second year, and $22,500 for the third year. Should the management accept the project by analyzing the net present value (NPV) of the cash flow stream if they have 12.00% minimum required rate of return on the project?
Desai Industries is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value. No change in net operating working capital would be required. This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. What is the project's expected NPV? 10.0% $200,000 39,000 $25.00 WACC Net investment cost (depreciable basis) Units sold Average price per unit, Year 1 Fixed op. costs excl. depr. (constant) Variable op. cost/unit, Year 1 Annual depreciation rate Expected inflation rate per year Tax rate Oa. -$64.886 Ob. -$66,833 Oc. -$72,673 O d. -$73,970 O e. -$60,993 $150,000 $20.20 33.333% 5.00% 40.0%
solve these 2 pratice problems
Galaxy Corp. has to choose between two mutually exclusive projects. If it chooses project A, Galaxy Corp. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 11%? Project A Year 0: Year 1: Year 2: Year 3: O $15,077 O $21,538 $12,923 O $14,000 O $19,384 Cash Flow -$12,500 8,000 14,000 13,000 Project B Year 0: Year 1: Year 2: Year 3: Year 4: Year 5: Year 6: -$40,000 9,000 13,000 12,000 11,000 10,000 9,000
Which of the following statements is true? O The salvage value of new equipment should not be considered when using the internal rate of return method to evaluate a project. O The internal rate of return method assumes that the cash flows generated by a project are reinvested at a rate of return that equals the company's cost of capital. O The profitability index and the internal rate of return will always result in the same preference ranking for investment projects. O In calculating the profitability index, the initial investment in the project should be reduced by any proceeds from the sale of old equipment. O None of the above statements is true.
In the estimation of incremental cash flows for a new project, several costs and issues are considered. In reference to the lecture materials for cash flow estimation, list the seven important issues to be kept track of in estimating incremental cash flows for expansion, replacement, or new capital projects. [No explanation is required for this part.]
The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Cute Camel Woodcraft Company: Cute Camel Woodcraft Company is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Delta’s expected future cash flows. To answer this question, Cute Camel’s CFO has asked that you compute the project’s payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Complete the following table and compute the project’s conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) Year 0 Year 1 Year 2 Year 3 Expected cash flow -$5,000,000 $2,000,000 $4,250,000…
1. Calvulate the internal rate of return(IRR) of each project and based on this criterion. Indicate which project you would recommend or acceptance.
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: Cold Goose Metal Works Inc. is analyzing a project that requires an initial investment of $3,000,000. The project's expected cash flows are: Year Year 1 Cash Flow $375,000 Year 2 -175,000 Year 3 400,000 Year 4 450,000 Cold Goose Metal Works Inc.'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): O 14.83% O-19.30% O 20.07% 13.96% If Cold Goose Metal Works Inc.'s managers select projects based on the MIRR criterion, they should this independent project.
In my accounting class I am learning to find accounting rate of return. To solve for this I subtracted net cash flow- the salvage value divided by the initial investment. Have I done something incorrect?
Trovato Corporation is considering a project that would require an investment of $68,000. No other cash outflows would be involved. The present value of the cash inflows would be $89,080. The profitability index of the project is closest to (Ignore income taxes.):
Why is payback often used as the sole method of analyzing a proposed small project? Payback is the most desirable of the various financial methods of analysis. The benefits of payback analysis usually outweigh the costs of the analysis. Payback considers the time value of money. All relevant cash flows are included in the payback analysis. Payback is focused on the long-term impact of a project. OOOO

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