Suppose your firm is considering investing in a project with the cash flows show
ID: 2635753 • Letter: S
Question
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.
Explanation / Answer
a>In case of MIRR , all the inflows are invested @9% FV=1400*(1.09^5)+2600*(1.09^4)+1800*(1.09^3)+1800*(1.09^2)+1600*(1.09^1)+1400 13437.82 Now, 5200*(1+r)^6=13437.82 or 1+r=(13437.82/5200)^(1/6) 1.1714 or r=1.1714-1=0.1714 or MIRR=17.14% b>PV of the Inflow=730/1.06+860/(1.06^2)+1030/(1.06^3)+680/(1.06^4)+480/(1.06^5) 3216.192 Initial Investment 3300 PI=(PV of Inflow)/Investment=(3216.192/3300) 0.975
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