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EleoNora [17]
3 years ago
5

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 Cash Flow Year 1 $275,000 Year 2 –125,000 Year 3 450,000 Year 4 450,000 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): 21.58% 19.31% -16.50% 23.86% If Green Caterpillar Garden Supplies Inc.’s managers select projects based on the MIRR criterion, they should 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 greater than its MIRR. A typical firm’s IRR will be less than its MIRR.
Business
1 answer:
Hatshy [7]3 years ago
6 0

Answer:

MIRR -16.50%

They should reject the project is it destroys capital it do not meet to pay up the cost of the investment.

A typical firm’s IRR will be greater than its MIR

If the project yields higher than the cost of capital the IRR will be higher than the MIRR as reinvest the cashflow at the project yield rather than copany's cost of capital, thus it overstate the return.

Explanation:

MIRR = \sqrt{\frac{FV \: inflow}{PV \: outflow}} -1

WACC (cost of capital, reinvestment and financiation rate) = 7%

<em>Cash inflow:</em>

Inflow \: (1+ r)^{time} = Amount

Year 1 275000    336,886.825

Year 3 450000     481500

Year 4 450000    450000

Total                        1,268,386.825

<em>Cash outflow:</em>

F=                           -2,500,000

Year 2 -125000 -    109, 179.841

\frac{125,000}{(1 + 0.07)^{2} } = PV  

Total                    2,609,179.841

Now we can solve for MIRR:

MIRR = \sqrt[n]{\frac{FV \: inflow}{PV \: outflow}} -1

MIRR = \sqrt[4]{\frac{1,268,386.82}{2,609,179.84}} -1

MIRR - 16.49991% = -16.50%

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Answer: Sarah failed to evaluate a potential ethical issue.

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Rachel is preparing to open her own raft rental business, cleverly named Rachel's Rafts. She figures out that her fixed costs wi
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Answer:

selling price= $5

Explanation:

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Fixed cost= $7,500

Unitary variable cost= $2

Break-even point= 2,500 units

<u>The break-even point is the number of units to sell to cover the fixed costs. At this level, net income is zero.</u>

So given the costs structure and 2,500 units to sell, the selling price that provides the break-even point is:

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2 years ago
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anzhelika [568]

Answer:

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