13 % 110,000) (120,000) (185,000) (80,000) $190,000 17 16 19 200,000 s k 1 255,0

Question

13 % 110,000) (120,000) (185,000) (80,000) $190,000 17 16 19 200,000 s k 1 255,000 ?? k L 140,000 L. k a. $110,000 b. $15,000 $90,000 $185,000 120,03 e. $0 24 Whe chosing projects under c the above problem), which of the following is most CORRECT? a. NPV, IRR and MIRR will all agree as to which projects are profitable, so any of the three methods are appropriate to be used to decide which projects to accept. b. NPV should be used over IRR if the projects have unequal lives. c. Since a profitable project is going to be eliminated from the acceptable group, NPV should be used i positive interim cash flows exist for the projects. d. MIRR would always choose the better of two mutually exclusive projects since it uses the cost o e. Both c and d are correct. Devyn Richter has been given the following project to analyze. The company's cost of capital is 0%. capital as its reinvestment rate. 25 Time Cash Flow (900) (700) (600) 2600 (400) Which of the following statements is most FALSE? a. The project has non-normal cash flows. The MIRR will be lower than IRR because of the reinvestment rate assumption. c. An MIRR can be calculated for this project. d. The sum of the cash flows is zero so the IRR is zero. e. This project is not profitable for the relevant range of k. page 10 95

Explanation / Answer

Future value of all cash flows from Year - 1 to Year - 4 = 900

( Since cost of capital = 0, we see that future value of all the cash flows remains same.

so ...... - 700 - 600 + 2600 - 400 = 900)

Present value of investment = 900 ( year = 0)

900 * ( 1 + MIRR)4 = 900  

(1+MIRR)4 = 1

Thus ........... MIRR = IRR = 0 %

So the statement that MIRR < IRR is most false

Comment if you need more clarification ......... all the best

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