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 ass 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 $400,000. The project's expected cash flows are: Year Year 1 Year 2 Year 3 Cash Flow $325,000- -200,000 425,000 475.000

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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:
Green Caterpillar Garden Supplies Inc. is analyzing a project that requires an initial investment of $400,000. The project's expected cash
flows are:
Year
Year 1
Year 2
Year 3
Year 4
Cash Flow
$325,000
-200,000
425,000
475,000
Transcribed Image Text: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: Green Caterpillar Garden Supplies Inc. is analyzing a project that requires an initial investment of $400,000. The project's expected cash flows are: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $325,000 -200,000 425,000 475,000
Green Caterpillar Garden Supplies Inc.'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%
26.78%
24.45%
23.29%
If Green Caterpillar Garden Supplies Inc.'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 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.
this independent project.
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.
The IRR method uses only cash inflows to calculate the IRR. The MIRR method uses both cash inflows and cash outflows to calculate the
MIRR
Transcribed Image Text:Green Caterpillar Garden Supplies Inc.'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% 26.78% 24.45% 23.29% If Green Caterpillar Garden Supplies Inc.'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 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. this independent project. 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. The IRR method uses only cash inflows to calculate the IRR. The MIRR method uses both cash inflows and cash outflows to calculate the MIRR
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