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 project's 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 project's rate of return than the project's IRR can.

Blue Llama Mining Company is analyzing a project that requires an initial investment of $$600,000.$

The project's expected cash flows are:

Blue Llama Mining Company's WACC is $8\%,$ and the project has the same risk as the firm's

average project. Calculate this project's modified internal rate of return $($MIRR$).$

$15\mathrm{.}38\%$

$20\mathrm{.}80\%$

$14\mathrm{.}47\%$

$18\mathrm{.}09\%$

If Blue Llama Mining Company's managers select projects based on the MIRR criterion, they

should $,-$ this independent project.

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

MIRR method?

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.

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.

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.