Axis Chemical Co. is analyzing a project that requires an initial investment of
ID: 2652187 • Letter: A
Question
Axis Chemical Co. is analyzing a project that requires an initial investment of $2,225,000. The project’s expected cash flows are:
Year
Cash flow
Year 1
$375,000
Year 2
-150,000
Year 3
475,000
Year 4
425,000
1. Axis Chemical Co.’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):
a. 21.81%
b. 24.53%
c. -12.32%
d. 29.99%
2. If Axis Chemical Co.’s managers select projects based on the MIRR criterion, they should ___________this independent project.
a. reject
b. accept
3. Which oft the following statements about the relationship between IRR and the MIRR is correct?
a. A typical firm’s IRR will be greater than its MIRR.
b. A typical firm’s IRR will be equal to its MIRR.
c. A typical firm’s IRR will be less than its MIRR.
show how you got your answer. thanks
Year
Cash flow
Year 1
$375,000
Year 2
-150,000
Year 3
475,000
Year 4
425,000
Explanation / Answer
1)present value of cash outflow = 2225000 + pvf@7%,2years*150000
= 2225000+131015.81
= $ 2356015.81
MIRR = [n square root of (terminal cash flow/present value of cash outflow) ] -1
= [ 4 square root of(1392640/2356015.81)] -1
= [ 4 root of .5911]-1
=.8768-1
= -..1232or -12.32%
option "C" is correct as it is nearest to -12.32%
2)Project should be rejected.as it has negative MIRR
3)option "A" is correct. IRR gives most optimistic picture of potential of the project whereas MIRR gives most realistic evaluation of project
year cash flow Future value @7% terminal value 0 (2,225,000) - - 1 375,000 (1+.07)^(4-1) = 1.22504 459390 2 -150,000 - since it is negative it means it is an outflow 3 475,000 (1+.07)^(4-3) = 1.07 508250 4 425,000 (1+.07)^(4-4) = 1 425000 Terminal value 1392640Related Questions
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