Suppose your firm is considering investing in a project with the cash flows show
ID: 2737912 • 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.
Use the MIRR decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Time: 0 1 2 3 4 5 6 Cash flow –$9,900 $2,000 $3,200 $2,400 $2,400 $2,200 $2,000Use the MIRR decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Should it be accepted or rejected?Explanation / Answer
All Amounts in $ To calculate the MIRR, we need to work out the Future Value of all cash inflows, and divide the same by the cash outflows in Year T = 0 Future Value, Cash Flow wise With a required rate of return of 9% Year Cash Flow FV 1 2000 3077.248 2 3200 4517.061 3 2400 3108.07 4 2400 2851.44 5 2200 2398 6 2000 2000 Total 17951.82 Since the no. of years is 6, we have to take the sixth root of 17,951.82 / 9,900 Thus, the MIRR is 0.104279 calculated as ((17,951.82 / 9900) ^ 1/6) = 10.4279% Since the MIRR is greater than the expected rate of return of 9%, hence the project should be accepted.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.