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 $550,000. The project's expected cash flows are: Year Year 1 Cash Flow $275,000 Year 2 -200,000 Year 3 500,000 Year 4 475,000 Cold Goose Metal Works Inc.'s WACC 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): 20.64% 17.20% 16.34% 15.48% If Cold Goose Metal Works Inc.'s managers select projects based on the MIRR criterion, they should, Which of the following statements best describes the difference between the IRR method and the MIRR method? this independent project. The IRR method uses the present value of the initial investment to calculate the IRR. The MIRR method uses the terminal value of the initial investment to calculate the MIRR. The IRR method assumes that cash flows are reinvested at a rate of return equal to the IRR. The MIRR method assumes that cash flows are reinvested at a rate of return equal to the cost of capital. The IRR method uses only cash inflows to calculate the IRR. The MIRR method uses both cash inflows and cash outflows to calculate the 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: Cold Goose Metal Works Inc. is analyzing a project that requires an initial investment of $550,000. The project's expected cash flows are: Year Year 1 Cash Flow $275,000 Year 2 -200,000 Year 3 500,000 Year 4 475,000 Cold Goose Metal Works Inc.'s WACC 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): 20.64% 17.20% 16.34% 15.48% If Cold Goose Metal Works Inc.'s managers select projects based on the MIRR criterion, they should, Which of the following statements best describes the difference between the IRR method and the MIRR method? this independent project. The IRR method uses the present value of the initial investment to calculate the IRR. The MIRR method uses the terminal value of the initial investment to calculate the MIRR. The IRR method assumes that cash flows are reinvested at a rate of return equal to the IRR. The MIRR method assumes that cash flows are reinvested at a rate of return equal to the cost of capital. The IRR method uses only cash inflows to calculate the IRR. The MIRR method uses both cash inflows and cash outflows to calculate the MIRR.
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
Related questions
Question
None
Transcribed Image Text: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 $550,000. The project's expected cash
flows are:
Year
Cash Flow
Year 1 $275,000
Year 2 -200,000
Year 3
500,000
Year 4 475,000
Cold Goose Metal Works Inc.'s WACC 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):
20.64%
17.20%
16.34%
15.48%
If Cold Goose Metal Works Inc.'s managers select projects based on the MIRR criterion, they should
Which of the following statements best describes the difference between the IRR method and the MIRR method?
this independent project.
The IRR method uses the present value of the initial investment to calculate the IRR. The MIRR method uses the terminal value of
the initial investment to calculate the MIRR.
The IRR method assumes that cash flows are reinvested at a rate of return equal to the IRR. The MIRR method assumes that cash
flows are reinvested at a rate of return equal to the cost of capital.
The IRR method uses only cash inflows to calculate the IRR. The MIRR method uses both cash inflows and cash outflows to
calculate the MIRR.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education