Question

Modified internal rate of return (MIRR) The IRR evaluation method astumes that cash fows from the project are reinvested at the same rate equal to the IRR. However in reality the reinvested cash flows may not necessarily generate a feturn equal to the IRR. Thus, the modifed IRR approach makes a more reasonable assumption other than the project's inR. Consider the following situation: Grey Fox Aviation Company is analyzing a project that requires an initial investment of $550,000. The project's expected cash flows are: Grey Fox Aviation Companyss WACc is g\%w, and the project has the same risk as the firm's average project. Calculate this project's modified intemal rate of return (MIRR) 13,11% 17.739 15.42% 18.50%

Answer 1

MIRR is a financial metric used to assess investments, considering cash flows reinvested at the firm's WACC instead of the IRR. The risk level influences the stability of an investment's returns compared to expected returns, and the actual rate of return accounts for all forms of return over a period.

Step-by-step explanation:

The Modified Internal Rate of Return (MIRR) is a financial metric used to evaluate the attractiveness of investments or projects. Unlike the traditional Internal Rate of Return (IRR), which assumes that all cash flows generated by a project are reinvested at the IRR, the MIRR assumes reinvestment at the firm's cost of capital or a different rate that reflects the reality of reinvestment opportunities.

To calculate the MIRR, you need to know the project's initial investment, expected cash flows, and the reinvestment rate (typically the firm's weighted average cost of capital (WACC)).

Risk in investment terms refers to the uncertainty surrounding the actual returns that an investment or project will generate, as opposed to the expected rate of return.

High-risk investments fluctuate widely around their expected returns, while low-risk investments tend to have actual returns that are closer to their expected returns. The actual rate of return includes all forms of return, including capital gains and interest, earned over a period.