All parts are under one question therefore per your policy, all parts can be answered in full.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: Fuzzy Button Clothing Company is analyzing a project that requires an initial investment of $3,000,000. The project’s expected cash flows are:YearCash FlowYear 1$300,000Year 2–175,000Year 3425,000Year 4500,000 A. Fuzzy Button Clothing Company’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): 21.07% 20.19% -19.29% 14.93% B. If Fuzzy Button Clothing Company’s managers select projects based on the MIRR criterion, they should ? this independent project. C. 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 equal to its MIRR. A typical firm’s IRR will be less than its MIRR.

MIRR or the modified internal rate of return assumes that the company's cash flows can be reinvested…

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Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 16MC: When using the NPV method for a particular investment decision, if the present value of all cash...

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All parts are under one question therefore per your policy, all parts can be answered in full.

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:

Fuzzy Button Clothing Company is analyzing a project that requires an initial investment of $3,000,000. The project’s expected cash flows are:

Year	Cash Flow
Year 1	$300,000
Year 2	–175,000
Year 3	425,000
Year 4	500,000

A. Fuzzy Button Clothing Company’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):

21.07%

20.19%

-19.29%

14.93%

B. If Fuzzy Button Clothing Company’s managers select projects based on the MIRR criterion, they should ? this independent project.

C. 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 equal to its MIRR.

A typical firm’s IRR will be less than its MIRR.

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