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:

Celestial Crane Cosmetics is analyzing a project that requires an initial investment of $$2,500,000.$ The project's expected cash flows are:

Celestial Crane Cosmetics's WACC is $7\%,$ and the project has the same risk as the firm's average project. Calculate this project's modified internal rate

of return $($MIRR$)$:

$-17\mathrm{.}85\%$

$19\mathrm{.}09\%$

$17\mathrm{.}27\%$

$20\mathrm{.}00\%$

If Celestial Crane Cosmetics's managers select projects based on the MIRR criterion, they should

this independent project.

Which of the following statements about the relationship between the IRR and the MIRR is correct?

A typical firm's IRR will be less than its MIRR.

A typical firm's IRR will be equal to its MIRR.

A typical firm's IRR will be greater than its MIRR.