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:

Cute Camel Woodcraft Company is analyzing a project that requires an initial investment of

$$$600,000.$ The project's expected cash flows are:

Year Cash Flow

Year $1$$$325,000$

Year $2-125,000$

Year $3475,000$

Year $4,450,000$

Cute Camel Woodcraft Company'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$)$

a$)21\mathrm{.}12\%$

b$)15\mathrm{.}84\%$

c$)18\mathrm{.}48\%$

d$)17\mathrm{.}60\%$

If Cute Camel Woodcraft Company's managers select projects based on the MIRR criterion,

they should $[$reject or accept$]$ this independent project.

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

the MIRR method?

a$)$The IRR method assumes that cash flows are reinvested at a rate of return equal to the IRR.

The

b$)$MIRR method assumes that cash flows are reinvested at a rate of return equal to the cost of

capital.

c$)$ 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.

d$)$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.