The 21st Century Corporation uses the modified internal rate of return. The firm has a cost of capital of 8 percent. The project being analyzed is as follows ($20,000 investment):
Year1 Cash Flow=$10,000
Year2 Cash Flow=$9,000
Year3 Cash Flow=$6,800
a. What is the modified internal rate of return? An approximation from Appendix B is adequate. (You do not need to interpolate.)
b. Assume the traditional internal rate of return on the investment is 14.9 percent. Explain why your answer in part a would be lower.