Which of the following statements about the relationship between the IRR and the MIRR is correct? A typical firm's IRR will be greater than its MIRR. A typical firm's IRR will be less than its MIRR. A typical firm's IRR will be equal to its MIRR.
Which of the following statements about the relationship between the IRR and the MIRR is correct? A typical firm's IRR will be greater than its MIRR. A typical firm's IRR will be less than its MIRR. A typical firm's IRR will be equal to its 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
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Transcribed Image Text:Which of the following statements about the relationship between the IRR and the MIRR is correct?
A typical firm's IRR will be greater than its MIRR.
A typical firm's IRR will be less than its MIRR.
O A typical firm's IRR will be equal to its MIRR.
Transcribed Image Text:Celestial Crane Cosmetics is analyzing a project that requires an initial investment of $2,500,000. The project's expected cash flows are:
Year
Cash Flow
Year 1
$300,000
Year 2
-175,000
Year 3
425,000
Year 4
475,000
Celestial Crane Cosmetics'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):
23.18%
24.29%
-15.86%
O 19.87%
If Celestial Crane Cosmetics's managers select projects based on the MIRR criterion, they should
this independent project.
Expert Solution
Introduction
The IRR is the investment discount rate that corresponds to the difference between the original capital outlay and the present value of expected cash flows. It's a discount rate at which the NPV of all a project's cash flows equals zero.
MIRR is the price in an investment plan that equalises the most recent cash inflow with the most recent cash outflow. It's a variant of IRR in which the NPV of inflows (cash flows) equals the NPV of outflows (investments).
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