Blue Llama Mining Company is analyzing a project that requires an initial invest
ID: 2791399 • Letter: B
Question
Blue Llama Mining Company is analyzing a project that requires an initial investment of $600,000. The project's expected cash flows are Year Cash Flow Year $325,000 Year 2 -150,000 Year 3 475,000 Year 4500,000 Blue Llama Mining Company's WACC is 9%, and the project has the same risk as the firm's average project. Calculate this project's modified internal rate of return (MIRR): 14.91% 18.64% 19.57% 20.50% O O If Blue Llama Mining Company's managers select projects based on the MIRR criterion, they should independent project IS Which of the following statements best describes the difference between the IRR method and the MIRR method? O 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 O 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. O 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.Explanation / Answer
MIRR=(Future Value of Cash Inflows at t=4/Present Value of Cash Outflows at t=0)^(1/4)-1
=((325000*1.09^3+475000*1.09+500000)/(600000+150000/1.09^2))^(1/4)-1
=18.6358%
=18.64%
Accept as MIRR is more than WACC
IRR assumes cash flows to be reinvested at IRR but MIRR assumes cash flows to be reinvested at cost of capital