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 IRR.

Consider the following situation:

United Fried Cheese Co$.$ is analyzing a project that requires an initial investment of $$2,750,000.$ The project's expected cash flows are:

Year $3$$$425,000$

Year $4$$$425,000$

United Fried Cheese Co$.\text{'}$s WACC is $9\%,$ and the project has the same risk as the firm's average project. Calculate this project's modified internal rate

of return $($MIRR$).$

$-18\mathrm{.}75\%$

$-16\mathrm{.}07\%$

$-20\mathrm{.}54\%$

$-17\mathrm{.}86\%$

If United Fried Cheese Co$.\text{'}$s managers select projects based on the MIRR criterion, they should

this independent project.