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 $2,750,000. The project's expected cash flows are: Year Year 1 Year 2 Cash Flow $325,000 -100,000 400,000 Year 3 Year 4 425,000 Cute Camel Woodcraft Company's WACC is 9%, and the project has the same risk as the firm's average project. Calculate this project's modified internal rate of return (MIRR): 0 -17.99% 24.97% 19.54% 18.45% If Cute Camel Woodcraft Company'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. 9. Profitability index Estimating the cash flow generated by $1 invested in a project The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project's cash inflows divided by the absolute value of its initial cash outflow. Consider this case: Blue Moose Home Builders is considering investing $3,225,000 in a project that is expected to generate the following net cash flows: Year Year 1 Year 2 Cash Flow $275,000 $500,000 $400,000 $500,000 Year 3 Year 4 Blue Moose Home Builders uses a WACC of 7% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI (rounded to four decimal places): 0.5215 0.4346 0 0.4781 0.3911 Blue Moose Home Builders's decision to accept or reject this project is independent of its decisions on other projects. Based on the project's PI, the the project. firm should By comparison, the NPV of this project is in the project because the project . On the basis of this evaluation criterion, Blue Moose Home Builders should increase the firm's value. A project with a negative NPV will have a PI that is ; when it has a PI of 1.0, it will have an NPV