Question 21) Corbett and Sullivan Enterprises (CSE) use the Modified Internal Rate of Retu

21) Corbett and Sullivan Enterprises (CSE) use the Modified Internal Rate of Return (MIRR) when evaluating projects. CSE’s cost of capital is 9.5%. What is the MIRR of a project if the initial costs are $10,200,000 and the project lasts seven years, with each year producing the same after-tax cash inflows of $1,900,000?

A) About 7.95%

B) About 8.01%

C) About 8.24%

D) About 8.88%

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22) The IRR decision criterion is to accept a project if the IRR exceeds the desired or required return rate and to reject the project if the IRR is less than the desired or required rate of return.

23) The IRR is an unpopular capital budgeting decision model because even with the advent of calculators and spreadsheets, the cumbersome calculation remains.

Comment: The IRR is very popular because with the advent of calculators and spreadsheets the cumbersome calculation is a thing of the past. [NOTE. It can also be argued that the IRR is popular because lenders understand the IRR and know that a firm with an IRR greater than the cost of borrowing is a good investment.]

24) One problem with the decision criterion of IRR is that if cash flow is not standard, there is a possibility of multiple IRRs for a single project.

25) One of the underlying assumptions of the IRR model is that all cash inflow can be reinvested at the individual project’s internal rate of return (IRR) over the remaining life of the project.

26) Robinson, Inc. is considering a five-year project that has an initial outlay or cost of $70,000. The cash inflows from its project for years 1, 2, 3, 4 and 5 are all the same at $14,000. The borrowing costs are 10%. What is the IRR? Should Robinson use the IRR method to evaluation this project? Explain.

27) Carter, Inc. is considering a five-year project that has an initial outlay or cost of $22,000. The future cash inflows from its project for years 1, 2, 3, 4 and 5 are $15,000, $15,000, $15,000, $15,000 and – $41,000, respectively. Compute both IRRs. Given these IRRs, compute the two NPVs. If Carter’s true cost of borrowing for this project is 10%, would Carter choose the project?

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