Calculate the MIRR of the project using the discounting approach method. (Do not

Question

  

  

Calculate the MIRR of the project using the discounting approach method. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  

  

Calculate the MIRR of the project using the reinvestment approach method. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  

Calculate the MIRR of the project using the combination approach method. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  

Slow Ride Corp. is evaluating a project with the following cash flows:

Explanation / Answer

MIRR using discounted cash flow method:

MIRR is the rate at which NPV is 0 by discounting cash outflow with the cost of capital and inflows are discounted using finanical cost.

By using the above concept MIRR = -29,200-9600/(1+.09)5

= -29,200 - $6,239.34

=- $35,439.34.

Let x be the MIRR

0=-35,439.34 +$11,400/(1+x)+$14,100/(1+x)2+16,000/(1+x)3+$13,100(1+x)4

Solving this equation for x would give the MIRR rate.

Formula for MIRR using the reinvestment method is as follows:

=nthroot(Future value of cash flows at cost of capital/Present value of cash outflow) -1

Terminal cash flows=$67,640.54 - $9,600

Terminal cash flows=$58,040.54

Substituting the values in the formula =5th root($58,040.54/29,200) -1

1.14728 -1 =14.73%.

Therefore MIRR using reinvestment method =14.73%

MIRR using combination approach:

In this approach the present value of cash outflows is calculated:

= -29,200-9600/(1+.09)5

= -29,200 - $6,239.34

=- $35,439.34.

Future value of cash inflows:

MIRR =5th root($67,640.54/$35,439.34)

MIRR =1.138005 -1 =13.80%

Therefore MIRR using combination approach =13.80%

Cash flows Future value factor Future value $11,400.00 1.411582 $16,092.03 $14,100.00 1.295029 $18,259.91 $16,000.00 1.1881 $19,009.60 $13,100.00 1.09 $14,279.00 Total $67,640.54

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