Question

Number 1: Explain the answers to the following:

(a) If the IRR of a project exceeds the required rate of return, what do you know about the Modified Internal Rate of Return?

(b). Why should funds raised to satisfy the additional funds needed be considered long term funds?

Answer 1

(a) If the IRR of a project exceeds the required rate of return, what do you know about the Modified Internal Rate of Return?

IRR or the Internal Rate of Return is the discounted factor which explains the rate of return at which the Projected cash flows from the Project can deliver; This is considered as one of the parameters for evaluating the capital Budgeting exercise; If the IRR of the project is higher than its required rate of return or discounting factor, the project can be assumed as a feasible project. On the other hand, MIRR can be termed as an extension of the IRR which concentrates on the Profitability of the Project where by it calculates the Return % from the set of the cash flows projected, based on the assumption that if those cash flows are reinvested at a stipulated Reinvestment rate; MIRR shall represent more accurate and true picture of the rate of return of the projected estimated cashflows;

(b). Why should funds raised to satisfy the additional funds needed be considered long term funds?

Additional Funds Needed is a concept in finance which is precisely used for long term proejcts. This is generally used by the firms when the investments is in to major CAPEX, Strategic acquistions, Capacity expansion, Business expansions, etc; These shall be capital intensive proejcts and are generally long term in nature. Hence, any funds raised under this, shall be considered as Long Term Funds; Generally, Equity or Long Term Debt or Bonds issues are considered for these type of projects;