The Basics of Capital Budgeting: MIRR MIRR Business executives often prefer to work with rate of return, so to overcome some of the IRR's limitations the modified IRR was devised. The MIRR equation is: While the IRR's reinvestment rate assumption is the IRR, the MIRR's reinvestment rate assumption is the project's . As a result, the MIRR is generally a better indicator of a project's true than IRR. Unlike the IRR, there can be more than one MIRR, and the MIRR can be compared with the project's when deciding to accept or reject projects. For projects, the NPV, IRR, and MIRR always reach the same accept/reject conclusion; so the three criteria are equally good when evaluating projects. If projects are mutually exclusive and they differ in size, conflicts in project acceptance arise. In these cases, the is the best decision method because it selects the project that maximizes firm value. Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 8%. 0 1 2 3 4 Project A -1,200 700 440 270 320 Project B -1,200 300 375 420 770 What is Project A's MIRR? Round your answer to two decimal places. Do not round your intermediate calculations. % What is Project B's MIRR? Round your answer to two decimal places. Do not round your intermediate calculations. % If the projects were independent, which project(s) would be accepted according to the MIRR method? If the projects were mutually exclusive, which project(s) would be accepted according to the MIRR method?