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NEW QUESTION: 1
International Transport Company is considering building a new facility in Seattle. If the company goes ahead with the project, it will spend $2 million immediately (at t = 0) and another $2 million at the end of Year 1 (t = 1). It will then receive net cash flows of $1 million at the end of Years 2 - 5, and it expects to sell the property for $2 million at the end of Year 6. The company's cost of capital is 12 percent, and it uses the modified IRR criterion for capital budgeting decisions. Which of the following statements is most correct?
A. Given the data in the problem, the modified IRR criterion indicates that the project should be accepted.
However, the NPV is negative. This demonstrates that the modified IRR criterion is not always a valid decision method for projects such as this one.
B. The regular IRR is less than the cost of capital. Under this condition, the modified IRR will also be less than the regular IRR.
C. The project should be rejected because the modified IRR is less than the regular IRR.
D. The project should be accepted because the modified IRR is greater than the cost of capital.
E. If the regular IRR is less than the cost of capital, then the modified IRR will be greater than the regular IRR. That situation applies in this case.
Answer: E
Explanation:
Explanation/Reference:
Explanation:
PV(Outflows) = -$2,000,000 - $2,000,000/1.12 = -$3,785,714.
TV(Inflows) = $1,000,000(FVIFA(12%,4))(1.12) + $2,000,000
= $1,000,000(4.7793)(1.12) + $2,000,000 = $7,352,816.
1 + MIRR = [7,352,816/3,785,714]

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