RAK Corp. is evaluating a project with the following cash flows: The company use
ID: 2733041 • Letter: R
Question
RAK Corp. is evaluating a project with the following cash flows: The company uses an interest rate of 8 percent on all of its projects. Calculate the MIRR of the project using the discounting approach. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Calculate the MIRR of the project using the reinvestment approach. {Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Calculate the MIRR of the project using the combination approach. {Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)Explanation / Answer
Part A
In discounting approach, all the cash outflows are discounted back to present as used as initial investment.
We have following PV formula:
PV= FV/ (1+R) ^n
Therefore, year 0 cash flow would be:
Year zero cash flow = -29,400 -9800 / (1+0.08) ^5
= -29400 – 6669.72
= -36069.72
Now we can use IRR function in excel and compute MIRR:
Year
CF
0
-36069.7
1
11600
2
14300
3
16200
4
13300
IRR= 19.03%
So MIRR would be 19.03%.
Part B
In reinvestment approach, all the cash flows except year 0 cash flow is compounded to end of the project year.
So cash flow in year 5 would be
FV= 11,600 x (1+0.08)^4 + 14,300 x (1+0.08)^3 + 16,200 x (1+0.08)^2 + 13,300 x(1+0.08)^1 -9800
= 15,781.67 + 18,013.88 + 18,895.68 + 14364 -9800
= 57,255.23
Now we will solve for r, using a formula of FV:
FV= PV x (1+r)^n
57,255.23 = 29,400 x (1+r)^5
1+r = 1.1426
R = 14.26%
So MIRR would be 14.26%.
Part C
In combination approach all negative cash flows are brought back to present and all positive cash flows are compounded to end of the project year.
So cash flow in year 0 would be:
Year zero cash flow = -29,400 -9800 / (1+0.08) ^5
= -29400 – 6669.72
= -36069.72
Cash flow in year 5 would be:
FV= 11,600 x (1+0.08)^4 + 14,300 x (1+0.08)^3 + 16,200 x (1+0.08)^2 + 13,300 x(1+0.08)^1
= 15,781.67 + 18,013.88 + 18,895.68 + 14364
= 67,055.23
Now we will solve for r, using a formula of FV:
FV= PV x (1+r)^n
67,055.23 = 36,069.72 x (1+r)^5
1+r = 1.1320
R = 13.20%
So MIRR would be 13.20%.
Year
CF
0
-36069.7
1
11600
2
14300
3
16200
4
13300
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