Project X has a project with cost of capital of 9%, initial cost of $1,000, and annual after-tax cash flow of $450 for 3 years.Cash flow is reinvested at 8%.What are the IRR and MIRR, respectively?

Question

Quizplus · Accepted Answer

The IRR (Internal Rate of Return) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. In this case, the IRR is 16.65%, which is calculated based on the given cash flows and initial investment. The MIRR (Modified Internal Rate of Return) takes into account the cost of capital and the reinvestment rate for cash flows, providing a more accurate reflection of the project's profitability when cash flows are reinvested at a rate different from the IRR. Here, the MIRR is 13.47%, calculated by considering the reinvestment of cash flows at 8% rather than the IRR of 16.65%.

Project X Has a Project with Cost of Capital of 9