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 return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project's TRR. Consider the following situation: Cute Camel Woodcraft Company is analyzing a project that requires an initial investment of $2,225,000. The project's expected cash flows are: Year Cash Flow Year 1 $325,000 Year 2 -200,000 Year 3 425,000 Year 4 475,000 Cute Camel Woodcraft Company's WACC is 10%, and the project has the same risk as the firm's average project. Calculate this project's modified intemal rate of return (MIRR): 29.87% 27.38% 26.13% -12.91% this independent project. If Cute Camel Woodcraft Company's managers select projects based on the MIRR criterion, they should 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 less than its MIRR. A typical firm's IRR will be greater than its MIRR. Grade It Now Save & Continue Continue without saying S. NPV profiles An NPV profile plots a project's NPV at various costs of capital, tabeled "A" and "B" in the graph. A project's NPV profile is shown as follows, Identity the range of costs (ranges labeled "A" and "B") of capital that a firm would use to accept and reject this project. NPV Dollars 400 300 200 100 -100 200 06 6 10 12 14 16 18 20 COST OF CAPITAL, Iercent This NPV profile demonstrates that as the cost of capital increases, the project's NPV The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Blue Hamster Manufacturing Inc.: Blue Hamster Manufacturing Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Delta's expected future cash flows. To answer this question, Blue Hamster's CFO has asked that you compute the project's payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) Year o -$6,000,000 Year 1 $2.400,000 Year 2 $5,100,000 Year 3 $2,100,000 Expected cash flow Cumulative cash flow Conventional payback period: years The conventional payback period ignores the time value of money, and this concerns Blue Hamster's CFO. He has now asked you to compute Deita's discounted payback period, assuming the company has a 10% cost of capital. Complete the following table and perform any necessary calculations. Round the discounted cash flow values to the nearest whole dollar, and the discounted payback period to two decimal places. For full credit, complete the entire table. (Note: If your answer is negative, be sure to use a minus sign in your answer.) Year o -$6,000,000 Year 1 Year 2 $2,400,000 $5,100,000 Year 3 $2,100,000 Cash flow Discounted cash flow Cumulative discounted cash flow Discounted payback period: years Which version of a project's payback period should the CFO use when evaluating Project Delta, given its theoretical superiority? The discounted payback period The regular payback period One theoretical disadvantage of both payback methods-compared to the net present value method-is that they fail to consider the value of the cash flows beyond the point in time equal to the payback period. How much value in this example does the discounted payback period method fail to recognize due to this theoretical deficiency? $3,759,579 $1,577,761 $1,974,455 $5,792,637