Question

Consider the following situation:

Blue Llama Mining Company is analyzing a project that requires an initial investment of $400,000. The project’s expected cash flows are:

Year	Cash Flow
Year 1	$300,000
Year 2	–150,000
Year 3	450,000
Year 4	475,000

1) Blue Llama Mining Company’s WACC is 10%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR):

a) 21.71%

b) 24.43%

c) 31.21%

d) 27.14%

2) If Blue Llama Mining Company’s managers select projects based on the MIRR criterion, they should accept/reject ? this independent project.

3) 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 MIRR method assumes that cash flows are reinvested at a rate of return equal to the cost of capital.

b) 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.

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.

4) Suppose Praxis Corporation’s CFO is evaluating a project with the following cash inflows. She does not know the project’s initial cost; however, she does know that the project’s regular payback period is 2.5 years.

Year	Cash Flow
Year 1	$275,000
Year 2	$500,000
Year 3	$450,000
Year 4	$475,000

If the project’s weighted average cost of capital (WACC) is 10%, what is its NPV?

a) $309,459

b) $293,171

c) $325,746

d) $358,321

Answer 1