Question: The Caffeine Coffee Company uses the modified internal rate of return. The firm has a cost of capital of 12 percent. The project being analyzed is as follows ($27,000 investment):
Year Cash Flow
1 $15,000
2 12,000
3 9,000
a. What is the modified internal rate of return? An approximation from Appendix B is adequate for the final answer. (You do not need to interpolate.)
b. Assume the traditional internal rate of return on the investment is 17.5 percent. Explain why your answer in part a would be lower.