Question

Cute Camel Woodcraft Company is analyzing a project that requires an initial investment of $2,750,000. The project’s expected cash flows are:

Year |
Cash Flow |
---|---|

Year 1 | $350,000 |

Year 2 | –125,000 |

Year 3 | 400,000 |

Year 4 | 500,000 |

Cute Camel Woodcraft 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):

19.63%

-16.48%

27.71%

25.40%

If Cute Camel Woodcraft Company’s managers select projects based on the MIRR criterion, they should (accept/reject) 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.

Answer #1

**SEE THE IMAGE. ANY DOUBTS,
FEEL FREE TO ASK. THUMBS UP PLEASE**

8. 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 :
Cute Camel Woodcraft Company is analyzing a project that
requires an initial investment of $3,225,000....

Suppose Cute Camel Woodcraft Company is evaluating a proposed
capital budgeting project (project Alpha) that will require an
initial investment of $450,000. The project is expected to generate
the following net cash flows:
Year
Cash Flow
Year 1
$375,000
Year 2
$475,000
Year 3
$400,000
Year 4
$500,000
Cute Camel Woodcraft Company’s weighted average cost of capital
is 10%, and project Alpha has the same risk as the firm’s average
project. Based on the cash flows, what is project Alpha’s...

Cold Goose Metal Works Inc. is analyzing a project that requires
an initial investment of $2,225,000. The project’s expected cash
flows are:
Year
Cash Flow
Year
1
$350,000
Year
2
–200,000
Year
3
400,000
Year
4
400,000
Cold Goose Metal Works Inc.’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).
18.18%
20.46%
19.32%
-14.33%
If Cold Goose Metal Works Inc.’s managers select projects based...

Grey company is analyzing a project that requires an initial
investment of $600,000. The project's expected cash flows are:
(Year 1) $350,000, (Year 2) -$125,000, (Year 3) $500,000 and (Year
4) $400,000.
1. Grey company'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): _______%.
2. If Grey company's managers select projects based on the MIRR
criterion, they should accept or reject this
independent project....

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 $2,500,000. The project’s
expected cash flows are:
Year...

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:
Green Caterpillar Garden Supplies Inc. is analyzing a project
that requires an initial investment of $3,225,000....

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:
Blue Llama Mining Company is analyzing a project that requires
an initial investment of $450,000. The project’s expected cash
flows are:
Year
Cash...

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:
Green Caterpillar Garden Supplies Inc. is analyzing a project
that requires an initial investment of $2,500,000....

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 Alpha’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...

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:
Fuzzy Button Clothing Company is analyzing a project that
requires an initial investment of $500,000. The project’s...

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