Blue Llama Mining Company is analyzing a project that requires an initial invest

Question

Blue Llama Mining Company is analyzing a project that requires an initial investment of $450,000. The project's expected cash flows are: Year Cash Flow Year 1 $275,000 Year 2 -150,000 Year 3 450,000 Year 4 500,000 Blue Lama Mining mpany'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) 18.18% ? 22.73% O 27.28% 25.00% Blue Liama Mining company's managers select projects based on the MIRR criterion, they should this which of the following statements best describes the difterence between the IRR method and the MIRs method O The IRR method uses only cash inflows to calculate the IRR. The MIRI method uses both cash intlows a method uses the present value of the in tiai investment tocaicuiate the iRR. The MIRK method use method assumes that cash fiows are reinvested at a rate of re returs equa to the IRR. The MIR

Explanation / Answer

a)MIRR = [(Future value of cash flows/Present value of negative cash flow)^1/n]-1

Future value of cash flows at WACC

=275000×1.07^3+450000×1.07+500000

=336886.825+481500+500000

=1318386.825

Present value of negative cash flow=450000+150000/(1.07)^2

=450000+131015.80924=581015.80924

MIRR=[(1318386.825/581015.80924)^1/4]-1

=1.2273-1=22.73%

b)The company should accept independent project as the cost of capital is less than modified internal rate of return.

c)First statement is correct as in the given sum also present value of second years cash outflow is used.

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