Look again at the project cash flows in Practice Question 6. Calculate the modified IRR as defined

Question:

Look again at the project cash flows in Practice Question 6. Calculate the modified IRR as defined in footnote 5 in Section 5.3. Assume the cost of capital is 12 percent. Now try the following variation on the modified IRR concept. Figure out the fraction x such that x times C1 and C2 has the same present value as (minus) C₃.

Define the modified project IRR as the solution of

Now you have two modified IRRs. Which is more meaningful? If you can’t decide, what do you conclude about the usefulness of modified IRRs?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...