Green Caterpillar Garden Supplies Inc. is analyzing a project that requires an i
ID: 2618398 • Letter: G
Question
Green Caterpillar Garden Supplies Inc. is analyzing a project that requires an initial investment of $2,500,000. The project's expected cash flows are: Year Cash Flow Year 1 $375,000 Year 2 -200,000 Year 3 400,000 Year 4475,000 Green Caterpillar Garden Supplies Inc.'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). ? 22.60% ? 25.82% O-15.52% ? 19.37% If Green Caterpillar Garden Supplies Inc.'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? O A typical firm's IRR will be less than its MIRR A typical firm's IRR will be greater than its MIRR. O A typical firm's IRR will be equal to its MIRR.Explanation / Answer
We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.
Hence future value of inflows=375000(1.07)^3+400,000(1.07)+475000
=$1362391.125
Present value of outflows=Outflows*Present value of discounting factor(rate%,time period)
=2,500,000+200,000/1.07^2
=$2674687.746
MIRR=[Future value of inflows/Present value of outflows]^(1/time period)-1
=[$1362391.125/$2674687.746]^(1/4)-1
which is equal to
=(15.52%)(Approx)(Negative).
Hence since MIRR is negative;project must be rejected.
At irr,present value of inflows=present value of outflows.
Hence for a typical firm;IRR is greater than MIRR.
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