1. Fuzzy Button Clothing Company is analyzing a project that requires an investm
ID: 2383488 • Letter: 1
Question
1. Fuzzy Button Clothing Company is analyzing a project that requires an investment of $3,225,000. The project’s expected cash flows are:
Year
Cash Flow
Year 1
$300,000
Year 2
-200,000
Year 3
$450,000
Year 4
$500,000
Fuzzy Button Clothing Company’s WACC is 8%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR).
a. 13.78%
b. -20.40
c.16.08%
d. 18.37%
2. If Fuzzy Button Clothing Company’s managers select projects based on the MIRR criterion, they ______, this independent project.
a. Accept
b. Reject
3. Which of the following statements about the relationship between IRR and the MIRR is correct?
a. A typical firm’s IRR will be greater than it’s MIRR
b. A typical firm’s IRR will be less than it’s MIRR
c. A typical firm’s IRR will be equal to it’s MIRR
Year
Cash Flow
Year 1
$300,000
Year 2
-200,000
Year 3
$450,000
Year 4
$500,000
Explanation / Answer
Ans 1 Year Cash Flow 0 -32,25,000.00 1 3,00,000.00 2 -2,00,000.00 3 4,50,000.00 4 5,00,000.00 Total -21,75,000.00 Calculation of MIRR using Excel MIRR(Series of payment,Financing rate(Cost of Capital),Reinvesting Rate) MIRR((-32,25,000,300000,-200000,450000,500000)),.08,.08) -20.40% Ans 2 Reject the project Since the MIRR is -ve . To be capable of getting accepted MIRR should be atleast higher than WACC of the Project. Ans 3 a. A typical firm’s IRR will be greater than it’s MIRR MIRR assumes that the intermediary cash flows are reinvested at the firm's cost of capital rather than IRR, which is highly improbable considering the diminishing rate of return on additional capital
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