The Caffeine Coffee Company uses the modified internal rate of return. The firm has a cost of capital of 12 percent. The project being analyzed is as follows ($27,000 investment):

Year

1 .................... 2 .................... 3 ....................

Cash Flow

$15,000 12,000 9,000

a.What is the modified internal rate of return? An approximation from Appendix B is adequate for the final answer. (You do not need to interpolate.)

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b.Assume the traditional internal rate of return on the investment is 17.5 percent. Explain why your answer in part a would be lower.