please answer completely and correctly all questions thanks quiz action Fuzzy Bu
ID: 2782276 • Letter: P
Question
please answer completely and correctly all questions thanks
quiz action Fuzzy Button Cothing Corpany is analyzing a project that requires an iniial investment of $550,000. The project's expected cash flows are: ear Cash Flow Year 1 $275,000 Year 2-200,000 Year 3 450,000 Year 4 425,000 Fuzzy Button Clothing Company's NACC 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): 15.90% 11.56% 14.45% 13.73% o if Fuzzy Button Clothing Company's managers select projects based on the MIRR crterion, they should this independent project. Which of the following statements best descnbes the difterence between the IRR method and the MIRR method? The IRR mathod uses only cash nfons to allite the IRE. The MIR method uns Bath Cah untons and cash outflows to calculate the MIRR assumes that cash flows are reinvested at a rate of return equal to the cost of capital the terminal value of the initial investment to calculate the MIRR O The IRR method assumes that cash flows are reinvested at a rate of return equal to the IRR. The MIRR method O The IRR method uses the present value of the initial investment to calculate the IRR. The MIRR method usesExplanation / Answer
Requirement: 1
Year
Cash flow(C)
PV Factor F =1/(1+i)^n
PV = C x F
0
$ (550,000)
1/(1+0.07)^0
1
$ (550,000)
1
$ 275,000
1/(1+0.07)^1
0.93457944
$ 257,009
2
$ (200,000)
1/(1+0.07)^2
0.87343873
$ (174,688)
3
$ 450,000
1/(1+0.07)^3
0.81629788
$ 367,334
4
$ 425,000
1/(1+0.07)^4
0.76289521
$ 324,230
PV of investments = $ 550,000 + $ 174,688 = $ 724,688
PV of return cash flows = $ 257,009 + $ 367,334 + $ 324,230 = $ 948,574
MIRR = (PVR/PVI)1/n – 1 = ($ 948,574/$ 724,688)1/4 x (1 +0.07) -1
= (1.308941487)1/4 x (1.07) -1
= 1.069621338 x (1.07) -1
= 1.144494832 -1 = 0.144494832 or 14.45 %
Hence option 3rd is correct answer.
Based on MIRR, Fuzzy Button Clothing Company’s manager should select the project.
Requirement: 2
Modified internal rate of return (MIRR) assumes that positive cash flows are reinvested at the firm's cost of capital, and the initial outlays are financed at the firm's financing cost. On the other hand, IRR method takes granted the rate of IRR for calculation of reinvestment.
Hence option 2nd is correct answer.
Year
Cash flow(C)
PV Factor F =1/(1+i)^n
PV = C x F
0
$ (550,000)
1/(1+0.07)^0
1
$ (550,000)
1
$ 275,000
1/(1+0.07)^1
0.93457944
$ 257,009
2
$ (200,000)
1/(1+0.07)^2
0.87343873
$ (174,688)
3
$ 450,000
1/(1+0.07)^3
0.81629788
$ 367,334
4
$ 425,000
1/(1+0.07)^4
0.76289521
$ 324,230
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