Grey Fox Aviation Company is analyzing a project that requir

Grey Fox Aviation Company is analyzing a project that requires an initial investment of $2,750,000. The project\'s expected cash flows are: Grey Fox Aviation Company\'s VVACC is 8%, and the project has the same risk as the firm\'s average project. Calculate this project\'s modified internal rate of return (MIRR). If Grey Fox Aviation Company\'s managers select projects based on the MIRR criterion, they should independent project. Which of the following statements about the relationship between the IRR and the MIRR is correct? A typical Finn\'s IRR will be less than its MIRR. A typical Finn\'s IRR will be greater than its MIRR. A typical Finn\'s IRR will be equal to its MIRR.

Solution

MIRR = (Future value of all postive cash flow/present vallue of cash outflow)^1/n - 1

MIRR = (500000+425000(1.08) + 300000(1.08)³ ) / (200000(1.08)^-2+2750000 ) ^1/4 -1

MIRR = -17.75%

IRR can be calculated by equiating the postive and negative cash flow at its present value

This comes out to be -26%

Since MIRR is lower than cost of the company will reject the project.

MIRR is typiclly lower than IRR.