1 answer

4. Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from...

Question:

4. Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested
this independent project. If Celestial Crane Cosmeticss managers select projects based on the MIRR criterion, they should Wh
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 retun equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project's IRR Consider the following situation: Celestial Crane Cosmetics is analyzing a project that requires an initial investment of $600,000. The project's expected cash flows are: Year Cash Flow Year 1 $375,000 Year 2 -100,000 Year 3 450,000 Year 4 475,000 Celestial Crane Cosmetics'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) 19.80% 18.81 % 15.84% 20.79 %
this independent project. If Celestial Crane Cosmetics'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? The IRR method uses only cash infilows to calculate the IRR. The MIRR method uses both cash inflows and cash outflows to calculate the MIRR O 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 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

Answers

Future value of cash inflows Year Inflow FVF @ 7% FV 1 375000 1.225 4,59,391.13 450000 1.070 4,81,500.00 1.000 4 475000 4,75,

How to find MIRR?

For computation of MIRR, unlike IRR we assume that the reinvestment of cashflows are made at cost of capital. Hence , we need to find the terminal value of positive cashflows(return) and the present value of negative cashflows(outlay).

For computation of terminal value, we need to find what will be the value of each cashflow at the end of 4th year if reinvested at 7%. For year 1 , it will be Cashflow of year 1 x (1.07)3 . Similarly for year 3 it will be cashflow of year 3 x (1.07) , since it will be reinvested only for a year. For year 4 the value will be cashflow itself, since we have to find value at end of year 4.

The sum of these 3 figures will give you the terminal value.

For computation of Present value cashflows, in the given problem we have initial outlay and a negative cash flow in year2. Hence we need to find the PV factor and discount both these cashflows.

Now, by applying the formula given in the computation we can find the MIRR. Note: the n in formula refers to the no.of years. which in this case is 4.( hence the sort formula applied twice to arrive the answer using excel)

MIRR DECISION RULE

In case of MIRR, the project can be accepted if the MIRR is greater than the cost of capital.

Hence if Celestial Crane Cosmetics' managers select projects based on the MIRR criterion, they should select/accept this independent project.

Statement best describing difference between MIRR and IRR

Answer : statement 2: The IRR method assumes that the cashflows are reinvested at a rate of return equal to the IRR . The MIRR method assumes that the cashflows are reinvested at a rate of return equal to cost of capital.

Statement 1 is wrong because the basic principle of IRR is that it is the rate at which net present value of a project will be equal to zero.The NPV is the net present value of its cash inflows and outflows.

Statement 3 is partially wrong because in MIRR method also we need to calculate the present value of initial investment.

.

Similar Solved Questions

1 answer
Sensory
Mrs. S has recently been admitted to an assisted living community. At 75 – year-old retired nurse, she is able to function and independently perform most activities of daily living; however, she has experienced some minor injuries as a result of bumping into furniture in her room. Once, she tr...
1 answer
Write C code to repeatedly ask the user for a number, then once the user enters...
Write C code to repeatedly ask the user for a number, then once the user enters 0, the code displays the min, max and average of all values entered. To get proper credit, name the variables as listed below and follow the directions carefully. Do not use any break or similar type of statements. To im...
1 answer
The electrostatic potential (in volts) is given by Vx,y,z) 4.00 x Vo, where Vo is a...
The electrostatic potential (in volts) is given by Vx,y,z) 4.00 x Vo, where Vo is a constant, and x is in meters (a) Sketch the electric field for this potential. Choose File No file chosen This answer has not been graded yet. (b) Which of the following charge distributions is most likely responsibl...
1 answer
Directions: Answer each of the following question in 200 words or less. Write the answer in...
Directions: Answer each of the following question in 200 words or less. Write the answer in complete paragraphs, and cite your references used at the end of each question. Use APA format for in-text citations and for references, please. 1. The United States is said to have the most expensive healthc...
1 answer
Exercise 3-17B Net Inc. Rev. - Exp. = Cash Flow On Dec ledger. Assets Liab. Equity...
Exercise 3-17B Net Inc. Rev. - Exp. = Cash Flow On Dec ledger. Assets Liab. Equity + Prep. Rent Common Stock Ret. + Earn. Cash + d. What amount of net income would be reported on the Year 1 income statement? What is the amount of net cash flow from operating activities for Year 1? e. Determine the a...
1 answer
What is the percent composition of nitrogen, #N#, in ammonium sulfide, #(NH_4)_2S#?
What is the percent composition of nitrogen, #N#, in ammonium sulfide, #(NH_4)_2S#?...
1 answer
A fourteen-year, semiannual coupon bond is selling for $800. The bond has a face value of...
A fourteen-year, semiannual coupon bond is selling for $800. The bond has a face value of $1,000 and a yield to maturity of 6 percent. What is the coupon rate? A) 9.54 percent B) 4.23 percent C) 6.03 percent 4.23 percent 3.31 percent 4.68 percent 3.87 percent...
1 answer
Three charged particles are placed at the corners of an equilateral triangle of side 1.20 m...
Three charged particles are placed at the corners of an equilateral triangle of side 1.20 m (see (Figure 1)). The charges are Q1 = 7.6 μC , Q2 = -7.8 μC , and Q3 = -6.1 μC . Calculate the magnitude of the net force on particle 1 due to the other two and the direction of the net force on par...
1 answer
Problem 5-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6]...
Problem 5-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6] Due to erratic sales of its sole product-a high-capacity battery for laptop computers-PEM, Inc., has been experiencing financial difficulty for some time. The company'...
1 answer
How do viruses acquire an envelope? Viruses manufacture cell membranes because it is encoded in their...
How do viruses acquire an envelope? Viruses manufacture cell membranes because it is encoded in their nucleic acid. Animal viruses don't make membranous envelopes; these are only produced in phage viruses. Only DNA viruses make envelopes because they have a gene for phospholipid production. When...
1 answer
Suppose that α2 is an angle in quadrant 3 and that cos α=−725. Compute the exact...
Suppose that α2 is an angle in quadrant 3 and that cos α=−725. Compute the exact value of cos(α2). cos(α2)=...
1 answer
Amoxicillin 20 mg/kg/day divided q 8hr. is ordered for an 11 year old child with an...
Amoxicillin 20 mg/kg/day divided q 8hr. is ordered for an 11 year old child with an ear, nose and throat infection. The child weighs 36 kg. Your bottle of amoxicillin is labeled 200 mg / 5 mL. How many mL of amoxicillin will you give the child at each dose? ....
1 answer
7. State and prove the Law of Sines for triangles in Euclidean geometry. 8. Assume Euclidean geometry. Fix a circle and let AB and CD be two chords of the circle that intersect at point P. Prove that...
7. State and prove the Law of Sines for triangles in Euclidean geometry. 8. Assume Euclidean geometry. Fix a circle and let AB and CD be two chords of the circle that intersect at point P. Prove that AP × PB = CP × PD (one both sides of the equation you are multiplying the lengths) 7. S...
1 answer
Under the flexible exchange rate, list 3 or 4 steps that shows how an increase in...
Under the flexible exchange rate, list 3 or 4 steps that shows how an increase in demand for Canadian assets (for example bonds) by foreigners can lead to economic recession. Your answer should outline the chain of events (but NOT necessarily exactly as shown below). Increase in demand for CAD asset...
1 answer
The income and expenses of a corporation for federal income tax purposes are referred to as...
The income and expenses of a corporation for federal income tax purposes are referred to as what type of income Question 1 of 75. The income and expenses of a corporation for federal income tax purp O Book. O Nontaxable. O Accounting. Tax. □ Mark for follow up Question 2 of 75. The Form...
1 answer
-what is the difference between permanent and temporary accounts?
-what is the difference between permanent and temporary accounts?...
1 answer
You are interested in studying the expression of Neurogenesis-2 (NG-2), a protein that may have a...
You are interested in studying the expression of Neurogenesis-2 (NG-2), a protein that may have a role in neurogenesis in the brain. You know that neurogenesis slows/stops as mice age, so you hypothesize that it will be highly expressed in young mice compared to old mice. (NG-2 is a fake protein use...
1 answer
Amalgamated General Corporation is a consulting firm that also offers financial services through its credit division....
Amalgamated General Corporation is a consulting firm that also offers financial services through its credit division. From time to time the company buys and sells securities. The following selected transactions relate to Amalgamated’s investment activities during the last quarter of 2021 and t...
1 answer
Your organization is interested in a Telehealth program to close the gap for a rural community...
Your organization is interested in a Telehealth program to close the gap for a rural community that has significant health needs. You have chosen a framework, assessed the need for the program, and discussed the role of the informatics nurse. In this part of the informatics paper, you will develop a...