9. Modified internal rate of return (MIRR)

The IRR evaluation method assumes that cash flows from the project are reinvested at a rate equal to the projects IRR. However, in reality, the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, using the modified IRR approach, you can make a more reasonable estimate of a projects rate of return than the projects IRR can.

Consider the following situation:

Blue Llama Mining Company is analyzing a project that requires an initial investment of $600,000. The projects expected cash flows are:

Year	Cash Flow
Year 1	$325,000
Year 2	200,000
Year 3	425,000
Year 4	475,000

Blue Llama Mining Companys WACC is 9%, and the project has the same risk as the firms average project. Calculate this projects modified internal rate of return (MIRR).

A: 13.80%

B: 17.63%

C: 14.56%

D: 15.33%

If Blue Llama Mining Companys managers select projects based on the MIRR criterion, they should _________[accept/reject] this independent project.

Which of the following statements best describes the difference between the IRR method and the MIRR method?

A: 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.

B: 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.

C: 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.