\"1 Verizon? 3:53 PM Done 3 of 6 ? Module 5: Exam 5 Material-s x Take Test Exam

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"1 Verizon? 3:53 PM Done 3 of 6 ? Module 5: Exam 5 Material-s x Take Test Exam 5-SU18.F C Secure https QUESTION 26 b.uuou points Save Answer Miller and Sons is evaluating a project with the following cash flows: -$150,000 20,000 45,000 100,000 30,000 10,000 The company uses a 7 percent reinvestment rate and a 12 percent discount rate on all of its projects. What is the MIRR of the project using the discount approach? Hint: This information will be used on three related MIRR problems. 7.76 percent 9.05 percent 8.74 percent 7.05 percent 7.92 percent QUESTION 27 5.00000 points Save Answer Miller and Sons is evaluating a project with the following cash flows: Year 4 ]

Explanation / Answer

MIRR is the rate at which present value of terminal value of cash inflows is equal to the Present value of cash outflows. The terminal value is the future value (FV) of cash inflows and is computed using WACC as the rate of investment. In simpler words, we are comparing one cash inflow (terminal value) with one cash outflow (Present value of outflows). So, first we need to compute one future value of cash inflows.

FV = Amount x (1 + r)n where r is the WACC and n being the no. of years remaining

Now, Present value of Terminal Value = Present value of cash outflows

Terminal Value / (1 + MIRR)5 = $150,000 + [ $10,000 / (1 + 0.12)5 ]

or, $227,932.8552 / (1 + MIRR)5 = $150,000 + $5,674.268557

or, (1 + MIRR)5 = $227,932.8552 / $155,674.268557

or, (1 + MIRR)5 = 1.46416525552

or, (1 + MIRR) = (1.46416525552)1/5

or, 1 + MIRR = 1.0792

or, MIRR = 0.0792 or 7.92%

Terminal Value Year Cash Flows Future value 1 $20,000 $20,000 x (1 + 0.07)4 = $26,215.9202 2 $45,000 $45,000 x (1 + 0.07)3 = $55,126.935 3 $100,000 $100,000 x (1 + 0.07)2 = $114,490 4 $30,000 $30,000 x (1 + 0.07)1 = $32,100 Terminal Value $227,932.8552

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