RAK Corp. is evaluating a project with the following cash flows: -$29,500 11,700
ID: 2540863 • Letter: R
Question
RAK Corp. is evaluating a project with the following cash flows: -$29,500 11,700 14,400 16,300 13,400 - 9,900 The company uses an interest rate of 9 percent on all of its projects Calculate the MIRR of the project using the discounting approach. (Do not round inter calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. MIRR intermediate Calculate the MIRR of the project using the reinvestment approach. (Do not round calculations. Enter your answer as a percent rounded to 2 decimal places, e.g 32.16.) MIRR Calculate the MIRR of the project using the combination approach. (Do n calculations. Enter your answer as a percent rounded to 2 decimal places, e.g, 32.1 MIRR ot round intermediate 6.) 1%Explanation / Answer
Answer a.
Discount Approach:
Present Value of Cash Outflows = -$29,500 - $9,900/1.09^5
Present Value of Cash Outflows = -$35,934.32
Let MIRR be i%
0 = -$35,934.32 + $11,700/(1+i) + $14,400/(1+i)^2 + $16,300/(1+i)^3 + $13,400/(1+i)^4
Using financial calculator:
i = 19.59%
MIRR = 19.59%
Answer b.
Reinvestment Approach:
Future Value of Future Cash Flows = $11,700*1.09^4 + $14,400*1.09^3 + $16,300*1.09^2 + $13,400*1.09 - $9,900
Future Value of Future Cash Flows = $59,235.95
Let MIRR be i%
0 = -$29,500 + $59,235.95/(1+i)^5
Using financial calculator:
i = 14.96%
Answer c.
Combination Approach:
Present Value of Cash Outflows = -$29,500 - $9,900/1.09^5
Present Value of Cash Outflows = -$35,934.32
Future Value of Cash Inflows = $11,700*1.09^4 + $14,400*1.09^3 + $16,300*1.09^2 + $13,400*1.09
Future Value of Cash Inflows = $69,135.95
MIRR = [Future Value of Cash Inflows / (-Present Value of Cash Outflows)]^(1/n) - 1
MIRR = [$69,135.95 / $35,934.32]^(1/5) - 1
MIRR = 1.1398 - 1
MIRR = 0.1398 = 13.98%
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