Suppose your firm is considering investing in a project with the cash flows show

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 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.

   

  

Use the MIRR decision rule to evaluate this project.(Do not round intermediate calculations and round your final answer to 2 decimal places.)

  Time: 0 1 2 3 4 5 6   Cash flow –$10,000 $2,100 $3,300 $2,500 $2,500 $2,300 $2,100 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 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the MIRR decision rule to evaluate this project.(Do not round intermediate calculations and round your final answer to 2 decimal places.)

Explanation / Answer

Since MIRR is greater than cost of capital, the project is accepted.

Year Cashflows PV Factor @8% PV @ 8% Future Value at terminal year a c a*b 0 -$10,000.00 1.0000 -$10,000.00 1 $2,100.00 0.9259 $1,944.44 $3,085.59 2 $3,300.00 0.8573 $2,829.22 $4,489.61 3 $2,500.00 0.7938 $1,984.58 $3,149.28 4 $2,500.00 0.7350 $1,837.57 $2,916.00 5 $2,300.00 0.6806 $1,565.34 $2,484.00 6 $2,100.00 0.6302 $1,323.36 $2,100.00 $18,224.48 MIRR Future Value of Inflows can be calculated using Compound Interest Formula = P * [(1+r)^n - 1] Future Value of Inflows = $18,224,.48 MIRR = [(FV of Inflow / PV of Outflow)^1/n] - 1 = [(18224.48/10000) ^ 1/6] - 1 = 1.105204 - 1 = 10.5204% or 10.52%

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