Wyatt and Zachary Enterprises (WZE)uses the Modified Internal Rate of Return

question 64

Essay

Wyatt and Zachary Enterprises (WZE)uses the Modified Internal Rate of Return (MIRR)when evaluating projects.WZE's cost of capital is 9.75%.What is the MIRR of a project if the initial cost is $1,200,000 and the project will last seven years,with each year producing cash inflows of $290,000? Should WZE accept this project according to the MIRR method? Explain.

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Definitions:

Effective Interest Method

A way of amortizing bond premiums or discounts over the bond's life that reflects the constant yield to maturity.

Premium Amortization

The process of gradually writing off the initial premium paid on a bond above its par value over the life of the bond.

Bonds

Bonds are financial instruments representing a loan made by an investor to a borrower, typically corporate or governmental, which pays interest over time and returns the principal at maturity.

Effective Yield

The total yield on an investment, taking into account the compounding of interest, as opposed to just the nominal rate.