The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality thereinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumptionother 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 flowsare:YearYear 1Cash Flow$375,000Year 2 -175,000Year 3 400,000Year 4 450,000Cold 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 internalrate 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 shouldthis independent project.

Step 1: The calculation of the MIRR AB1YearCashflow20 $ (3,000,000.00)31 $ 375,000.00 42 $…

Answered: The IRR evaluation method assumes that…

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

Section: Chapter Questions

Problem 2CMA: Staten Corporation is considering two mutually exclusive projects. Both require an initial outlay of...

See similar textbooks

Similar questions

The management of Ryland International Is considering Investing in a new facility and the following cash flows are expected to result from the investment: A. What Is the payback period of this uneven cash flow? B. Does your answer change if year 6s cash inflow changes to $920,000?
Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is 2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Required: 1. Compute the projects payback period. 2. Compute the projects accounting rate of return. 3. Compute the projects net present value, assuming a required rate of return of 10 percent. 4. Compute the projects internal rate of return.
San Lucas Corporation is considering investment in robotic machinery based upon the following estimates: a. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of 700,000. Use the present value tables appearing in Exhibits 2 and 5 of this chapter. b. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of 500,000, 700,000, and 900,000. Use the present value tables (Exhibits 2 and 5) provided in the chapter in determining your answer. c. Determine the minimum annual net cash flow necessary to generate a positive net present value, assuming a desired rate of return of 10%. Round to the nearest dollar. d. Interpret the results of parts (a), (b), and (c).
Staten Corporation is considering two mutually exclusive projects. Both require an initial outlay of 150,000 and will operate for five years. The cash flows associated with these projects are as follows: Statens required rate of return is 10%. Using the net present value method and the present value table provided in Appendix A, which of the following actions would you recommend to Staten? a. Accept Project X and reject Project Y. b. Accept Project Y and reject Project X. c. Accept Projects X and Y. d. Reject Projects X and Y.
There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,000 and is expected to generate the following cash flows: Use the information from the previous exercise to calculate the internal rate of return on both projects and make a recommendation on which one to accept. For further instructions on internal rate of return in Excel, see Appendix C.
Now assume that the equipments residual value could be as low as 0 or as high as 400,000, but 200,000 is the expected value. Because the residual value is riskier than the other relevant cash flows, this differential risk should be incorporated into the analysis. Describe how this could be accomplished. (No calculations are necessary, but explain how you would modify the analysis if calculations were required.) What effect would the residual values increased uncertainty have on Lewis lease-versus-purchase decision?
The management of Kawneer North America is considering investing in a new facility and the following cash flows are expected to result from the investment: A. What is the payback period of this uneven cash flow? B. Does your answer change if year 10s cash inflow changes to $500,000?
he 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 $3,000,000. The project’s expected cash flows are: Year Cash Flow Year 1 $275,000 Year 2 –150,000 Year 3 475,000 Year 4 400,000 Green Caterpillar Garden Supplies 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): 15.88% 14.21% 18.39% -20.35% If Green Caterpillar Garden Supplies Inc.’s managers select projects based on the MIRR criterion, they should 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: Grey Fox Aviation 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 $275,000 Year 2 –175,000 Year 3 500,000 Year 4 400,000 Grey Fox Aviation 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): 15.62% -17.89% 20.51% 22.46% If Grey Fox Aviation Company’s managers select projects based on the MIRR criterion, they should this independent project. Which of the following statements…
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 –150,000 Year 3 400,000 Year 4 400,000 Cold Goose Metal Works Inc.’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): 17.23% 15.66% 18.01% 12.53% If Cold Goose Metal Works Inc.’s managers select projects based on the MIRR criterion, they should this independent project. Which of the following statements…
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 $400,000. The project’s expected cash flows are: Year Cash Flow Year 1 $375,000 Year 2 –150,000 Year 3 400,000 Year 4 425,000 Grey Fox Aviation Company’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): 25.38% 24.11% 29.19% 26.65% Points: Close Explanation Explanation: If Grey Fox Aviation Company’s managers select projects based on the MIRR criterion, they should selector 1…
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 $600,000. The project’s expected cash flows are: Year Cash Flow Year 1 $275,000 Year 2 –125,000 Year 3 475,000 Year 4 425,000 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): 16.50% 14.03% 14.85% 15.68% If Cute Camel Woodcraft Company’s managers select projects based on the MIRR criterion, they should______________this independent project. accept reject Which of the following statements best describes the…

SEE MORE QUESTIONS

Recommended textbooks for you

Financial And Managerial Accounting

Accounting

ISBN:

9781337902663

Author:

WARREN, Carl S.

Publisher:

Cengage Learning,

Managerial Accounting

Accounting

ISBN:

9781337912020

Author:

Carl Warren, Ph.d. Cma William B. Tayler

Publisher:

South-Western College Pub

Cornerstones of Cost Management (Cornerstones Ser…

Accounting

ISBN:

9781305970663

Author:

Don R. Hansen, Maryanne M. Mowen

Publisher:

Cengage Learning

Financial And Managerial Accounting

Accounting

ISBN:

9781337902663

Author:

WARREN, Carl S.

Publisher:

Cengage Learning,

Managerial Accounting

Accounting

ISBN:

9781337912020

Author:

Carl Warren, Ph.d. Cma William B. Tayler

Publisher:

South-Western College Pub

Cornerstones of Cost Management (Cornerstones Ser…

Accounting

ISBN:

9781305970663

Author:

Don R. Hansen, Maryanne M. Mowen

Publisher:

Cengage Learning

Corporate Fin Focused Approach

Finance

ISBN:

9781285660516

Author:

EHRHARDT

Publisher:

Cengage

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Principles of Accounting Volume 2

Accounting

ISBN:

9781947172609

Author:

OpenStax

Publisher:

OpenStax College

SEE MORE TEXTBOOKS