Blue Llama Mining Company is analyzing a project that requires an initial investment of $500,000....
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Finance
Blue Llama Mining Company is analyzing a project that requires an initial investment of $500,000. The projects expected cash flows are:
Year
Cash Flow
Year 1
$325,000
Year 2
100,000
Year 3
450,000
Year 4
500,000
Blue Llama Mining Companys WACC is 8%, and the project has the same risk as the firms average project. Calculate this projects modified internal rate of return (MIRR):
20.60%
26.66%
27.88%
24.24%
If Blue Llama Mining Companys managers select projects based on the MIRR criterion, they should this independent project.
Which of the following statements best describes the difference between the IRR method and the MIRR method?
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.
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.
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