a. Dunia Construction Co. (DCC) is considering a new inventory system that will

Question

a.            Dunia Construction Co. (DCC) is considering a new inventory system that will cost RM750,000. The system is expected to generate positive cash flows over the next four years in the amounts of RM350,000 in year one, RM325,000 in year two, RM150,000 in year three, and RM180,000 in year four. DCC's required rate of return is 8%.

i.              What is the net present value of this project?

ii.             What is the internal rate of return of this project?

iii.            What is the modified internal rate of return of this project?

Explanation / Answer

1) NPV= -750000+(350000/1.08^1) + (325000/1.08^2) + (150000/1.08^3) + (180000/1.08^4) = $104.089.40

2)IRR implies NPV = 0

750000 =(350000/(1.+r)^1) + (325000/(1.+r)^2) + (150000/(1.+r)^3) + (180000/(1.+r)^4)

IRR=r=15.13%

3)MIRR =[{Sum of Terminal Cash Flows other than Intial Investment/Initial Investment}^(1/number of periods)]-1

Sum of Terminal Cash Flows other than Intial Investment/Initial Investment =

350000(1.08)^3 +325000(1.08)^2+150000(1.08)^1+180000(1.08)^0 = $1161979.2

MIRR = [{ $1161979.2/750000}^(1/4)]-1 = 0.1156 = 11.56%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.