IRR, or internal rate of return, is often interpreted as the annual equivalent rate of return for a project. As a result, IRR is a popular and it seems intuitive approach for managers to evaluate a project. It is easy to look at a project with an IRR of 15%, and see this as favorable compared to a weighted average cost of capital of 12% or a mortgage of 8%. If you were a financial manager, you would accept this project.
However, let’s say you invested $100 today in order to receive two payments in the future: $60 at the end of one year and $60 at the end of two years. We can find the internal rate of return by setting the net present value equal to zero, and determining the discount rate that solves this equation.
NPV = 0 = -$100 + 60/(1 + r) + 60/(1 + r)2
IRR = 13%
Critics suggest that that IRR intrinsically overstates a project’s actual return. Let’s look at this claim. If we can borrow the initial $100 at 5%, how much money would have from the project after the two years to pay back the $100 we borrowed? If we use the IRR of 13%, we get a future value of $127.80. (If we discount this back using 13%, we also get the present value of $100).
FV = $60(1.13) + $60 = $67.80 + $60 = $127.80
However, we know that that first cash inflow of $60 is unlikely to be reinvested at 13%. To be accurate, we should assume that this $60 is put towards the money we borrowed, and actually only saves us 5%. If we calculate the future value using this assumption, we find that the project will only make us $123 in two years.
FV = $60(1.05) + $60 = $63 + $60 = $123
As a result, we will want to use this new number to calculate a modfied internal rate of return (MIRR) that more accurately reflects the returns of the project.
PV = FV/(1+r)n
100 = 123/(1 + r)2
(1 + r)2 = 123/100
1 + r = √($123/$100)
r = √($123/$100) – 1
r = 10.91%
While we worked this last question step-by-step, we can use the formula for the modified internal rate of return for longer investments. This formula, in general, is:
n = the number of periods at the end of which a cash flow occurs (not the number of cash flows)
FV = the future value of the positive cash flows at the end of the last period, calculated using the reinvestment rate, or what the company could earn by reinvesting the cash flows externally
PV = the present value of the negative cash flows discounted to the beginning of the first period, using the finance rate or what it would cost to raise capital from external sources
Because the modified internal rate of return (MIRR) seperates negative and positive cash flows, it also avoids the problem of multiple answers (the IRR formula may have multiple rates of return as solutions). It is often reasonable to use the weighted average cost of capital for the reinvestment or finance rate.
Photo by marianne bos on Unsplash
© BrainMass Inc. brainmass.com November 7, 2021, 1:55 am ad1c9bdddf
BrainMass Solutions Available for Instant Download
Interest Rates, US and Global Economies
Explain two ways interest rates influence the U. S. and global financial environment. Provide one example of such influence for both the U. S. financial environment and one example for the global financial environment.
NPV, IRR and MIRR
Given the following capital project data: Cost of automation system (invoice): $750,000 Transportation and installation: $150,000 Training: $100,000 Firm’s WACC: 10% Firm’s tax rate: 40% Depreciation 5 years, straight line Life of project: 3 years Salvage value: $375,000 Annual cost savi
Calculate the value that will be lost if MIRR method is preferred over NPV criteria.
Nast Incorporated is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone, if any? Cash Flows (CF
Investment Decision Making: NPV, IRR and MIRR
Problem 1: Suppose a company is considering two independent projects, Project A and Project B. The cash outlay for Project A is $14,000. The cash outlay for Project B is $20,000. The company’s cost of capital is 12%. The following table shows the after-tax cash flows. For each project, compute the NPV, the IRR, the MIRR, and i
Identify and explain various capital budgeting methods
Define the various capital budgeting methods such as net present value (NPV), internal rate of return (IRR), et cetera, and explain how they differ from one another. Identify which, if any, of the methods discussed might be superior to the others and explain why.
1) Great Lakes Clinic has been asked to provide exclusive healthcare services for next year’s World Exposition. Although flattered by the request, the clinic’s managers want to conduct a financial analysis of the project. There will be an up-front cost of $160,000 to get the clinic in operation. Then, a net cash inflow of $1mil
Valuation Methodologies – NPV, IRR, and MIRR
Please help with the following problem. Briefly describe the following three key valuation methodologies that companies use – Net Present Value (NPV), Internal Rate of Return (IRR), and Modified Internal Rate of Return (MIRR). Please site any sources and provide references.
Present Value and Capital Budgeting Problems
Part I: This part tests my your ability to calculate present value. A. Suppose your bank account will be worth $15,000.00 in one year. The interest rate (discount rate) that the bank pays is 7%. What is the present value of your bank account today? What would the present value of the account be if the discount rate is only
IRR, MIRR, and Discounted Cashflow
** Please see the attached file for the data ** Calculate payback, internal rate of return (IRR), modified internal rate of return (MIRR), and net present value (NPV), and make a recommendation whether the company should open the mine based on your calculations.
Financial Reporting Study Guide
I need help with this study guide. Thank you! 1) When is using the P/E to value stock better than using the constant growth (also known as the DCF) model? 2) A stock will pay a dividend of $2.00 this coming year. The expected growth rate in dividends is 4% and the required rate of return is 12%. What is the indica
XYZ is analyzing a project: Non normal cash flows, MIRR; Jones Construction IRR
XYZ is analyzing a project with the following cash flows: 0 years=-$3000 1 year=$1200 2 year=-$400 3 year=$1800 4 year=$1800 1) The project has normal or non-normal cash flows? XYZ WACC is 9.6% and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (M
Discount Rate of Return & Investment Rate of Return
1. What is the difference in basis points between the discount rate of return (DR) and the investment rate of return (IR) on a 10 million commercial paper note purchased at a price of 9.85 million and scheduled to mature in 25 days? 2. A commercial paper note with 1 million par value and maturing in 60 days has an expected D
Capital Budgeting Assignment
1. A firm should never accept a project if its acceptance would lead to an increase in the firm’s cost of capital (its WACC). A. True B. False 2. Because “present value” refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should not be summed to determine
Determining whether or not to undertake ventures
Dream Inc. is considering two projects with the following after-tax cash flows Expected net cash flows Time Project A Project B 0 ($30) ($30) 1 $5 $20 2 $10 $10 3 $15 $8 4 $20 $6 Either venture would be funded wit
Required Rate of Return on Okefenokee Stock
9-11. The total market value of the common stock of the Okefenokee Real Estate Company is $ 6 million, and the total value of its debt is $ 4 million. The treasurer estimates that the beta of the stock is currently 1.5 and that the expected risk premium on the market is 6%. The Treasury bill rate is 4%. Assume for simplicity tha
Calculating Net Value Present and IRR
You will compare three projects. The following table lists each projects initial outlay (price of the project) in year 0 (zero). The following years are the cash inflows. All projects receive the same total cash inflows. They differ on when the cash flows occur and the amount of the annual cash flow You will show your work in a
Solving Various Capital Budgeting Problems
____ 11. Which of the following statements is CORRECT? a. The WACC is calculated using before-tax costs for all components. b. The after-tax cost of debt usually exceeds the after-tax cost of equity. c. For a given firm, the after-tax cost of debt is always more expensive than the after-tax cost of non-convertible preferred s
On the basis of these data, what is the real risk-free rate of return?
You read in The Wall Street Journal that 30-day T- bills are currently yielding 5.5%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums: Inflation premium 3.25% Liquidity premium 0.6% Maturity risk premium 1.8% Default risk premium 2.1
Elite Jewellery vs So Lo Supermarkets: Expected rate of return and standard deviation
You have some money to invest for 12 months and are considering purchasing shares in the retail sector. After reviewing the historical performance and future prospects for Elite Jewellery Ltd. and So Lo Supermarkets Ltd, you have prepared the following information that you willuse for your investment decision:
Recommendation for a project using MIRR
You company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below: Year X Y 0 (1,000) (1,000) 1 100 1,000 2 300 100 3 400 50 4 700 50 The projects are equally risky, and their cost of capital is 12%. You must make a recommendation, and you must base it on th
10 Finance multiple choice questions: project payback period, IRR, WACC, MIRR, NPV
1. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a. The longer a project’s payback period, the more desirable the project is normally considered to be by this criterion. b. One drawback of the payback criteri
What is the Risk-Free Rate of Return for 30 day US Treasury Bills
You read in the Wall Street Journal that 30-day US Treasury Bills are currently yielding 8%. Your brother in law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums: Inflation Premium = 5.0% Liquidity Premium = 1.0% Maturity Risk Premium = 2.0% Default Risk Premium = 2.0%
Indian River Citrus (cash flow estimation)
I need help with this case. I have no idea on how to solve this problem: I have to deyermine the FCF, NPV and the payback. 1. What is Indian River’s Year 0 net investment outlay on this project? What is the expected nonoperating cash flow when the project is terminated at Year 4? (Hint: Use Table 1 as a guide.) 2. Estima
What is Malholtra Inc. (Ehrmann Data System) Project’s MIRR?
Question: Malholtra Inc. (Ehrmann Data System) is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note, that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 10.00% Year: 0 1 2 3 4 Cash flows: $1,175 $30
Solving for MIRR
Question: Details for Ehrmann Data Systems: WACC: 10.75% Year 0 1 2 3 Cash flows -$1,000 $450 $450 $450 What is the MIRR for this company? The answer should be one of the following: 15.64% 14.48% 15.35% 15.49% 17.52%
What is the project’s MIRR?
20. Ingram Electric Products is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 9.50% Year 0 1 2 3 Cash flows -$800 $350 $350 $350 15.03%
What is the project’s MIRR?
16. Malholtra Inc. is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 10.00% Year 0 1 2 3 4 Cash flows -$1,325 $300 $320 $340 $360 3.12%
What is the project’s MIRR?
10. Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 12.00% Year 0 1 2 3 Cash flows -$1,000 $450 $450 $450 14.94%
What is the project’s MIRR?
8. Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 8.75% Year 0 1 2 3 Cash flows -$1,000 $450 $450 $450 13.74% 1
What is the Project’s MIRR?
Question: Ingram Electric Products is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note: A project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. Details: WACC: 14.75% Year 0 1 2 3 Cash flows -$800 $350 $350 $350
.To continue with the answer check on mycoursewriter.com/
Why Choose Us
Quality Homework Writing
Do you need to ace your test? We have qualified writers to assist you in writing 100% quality homework writing. Mycoursewriter offers students unique and personalized custom papers that help them in getting good grades. Our academic experts will assist you with your dissertation papers, thesis writing, research papers, term papers, and case study homework help. Our writers are experienced and have perfected the art of crafting the best essay writing papers regardless of your academic level. Order now and get our superb homework writing services.
Expert Academic Writers
A student needs professional assistance outside class time. Before hiring our writers, they undergo thorough tests and strict educational backgrounds. After passing a test, our writers undergo training to ensure they deliver expert professional papers to our customers. We ensure they meet the timely delivery of papers and follow our customers' provided instructions. Every writer is an ENL writer and is from the USA, Canada, UK, or Australia. Our experts approach papers effectively depending on their area of specialization.
Affordable Price Guarantees
Is the deal too good to be true? Mycoursewriter is the most affordable assignment help website on the market. We consider students' daily needs for academic help. Our paper costs are reasonably priced to approximately 90% of students around the globe. Our main aim is to ensure students achieve academic excellence, and we believe inconsiderable prices should not hinder students from getting quality homework writing help. In case of any dissatisfaction, we offer unlimited revisions and rewrites without extra charges.
Timely delivery of papers
Tight deadline? Is your paper due in the next few hours? Worry no more. Our writers are here for your rescue. Many college students find it hard to balance their social and academic life and get caught up with academic deadlines. Drafting your paper at the last minute does not allow you to conduct extensive research and craft the correct answers. We have expert writers ready to work on your assignment writing. Urgent writing services are the ultimate solutions you need. We guarantee you timely delivery of papers at your convenience and specified time delivery of the customer.
100% Original Tasks
The ultimate deal-breaker in achieving good grades is submitting imitative papers. Plagiarism is a breach of examination standards and has serious consequences. Students need to deliver papers written in their understanding by paraphrasing their research findings and relevant citations. Our expert's primary consideration is providing free plagiarized papers that meet the lecturers' requirements. Our editors will proofread your paper before delivery ad ensure your papers will not be substandard. We guarantee extreme originality, and in case of any customer concerns, we offer a plagiarism report.
All Round the clock Customer Support
Our website is user-friendly and super useful! Mycoursewriter is the most trusted online writing website always available to provide you with assignment writing services that you need. Our primary concern is meeting customer need specifications by our friendly customer support team that Is available all the time. Our website usability is self-learnable but in case of any problem, feel free to contact us directly through our website email: firstname.lastname@example.org. We have diligently satisfied thousands of students, and you can witness this on our sites' review page.
Try it now!
How it works?
Follow these simple steps to get your paper done
Place your order
Fill in the order form and provide all details of your assignment.
Proceed with the payment
Choose the payment system that suits you most.
Receive the final file
Once your paper is ready, we will email it to you.
Advantages of Using Our Assignment writing Services
Mycoursewriter welcomes you for superb essay writing services. We are a legit site offering help with your most challenging homework writing assignments at affordable prices. Your essay paper will be assigned to a professional writer who will craft the paper from scratch according to your provided instructions.
Essay writing is a common assignment writing for most college students. It takes a lot of time to craft a complete perfect essay. Mycourserwiter offers the best essay writing and proofreading services for most college students. Your paper is assigned to an expert writer who does thorough research on fresh ideas and personalizes your essay paper according to your assignment writing guidelines. Our essays are entirely exceptional and undergo a strict procedure that includes papers free from plagiarism and thorough proofreading.
Admission and Business Papers
Writing an admission paper is not every student's desire, and this should not hinder any student from earning an admission. Writing a perfect personal statement to earn a position in a dream school or job can be stressful. Personal statements should display a high level of confidence and uniqueness. Admission essays require you to have a vast knowledge of the current happenings in the world and knowhow of the business world. We have qualified writers with skills who will write your admission paper through comprehensive research. All you have to do is provide us with little details about yourself, instructions and our writers will craft a perfect paper for you.
Editing and Proofreading
Mycoursewriter offers you assignment writing services free from grammatical and formatting mistakes. An error-free paper is significant in scoring the desired maximum grades. We have a team of editors who will go through your paper after our expert writers have delivered their fully crafted papers. Our writers will cover all the aspects of your paper instructions, such as fonts, spacing, and educational formats. Our team of editors will check through your paper to make sure it meets the formatting style provided in the paper instructions. Under no circumstances will a poorly formatted paper will be forwarded to you as our team of editors will ensure careful proofreading.
Assignment writing is part of a learning process, and one may not have the knowledge to answer all questions correctly. This should not be a stress to you as we have qualified essay writing experts to help you. Our qualified writers are holders of PhDs, Degrees, and Masters in different areas of study and can handle any papers regardless of the complexity. Multiple assignments may be challenging to finish on time. Our skilled professional writers are here to assist you in crafting all the correct answers for your assignment. Stop stressing about your homework writing and place an order with us, and our expert writers will provide you with the best assignment help.