Chamberlain Corp. is evaluating a project with the following cash flows. The com
ID: 2755702 • Letter: C
Question
Chamberlain Corp. is evaluating a project with the following cash flows. The company uses a discount rate of 11 percent and a reinvestment rate of 8 percent on all of its projects.
Calculate the MIRR of the project using all three methods using these interest rates. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Year Cash Flow 0 –$ 15,500 1 6,600 2 7,800 3 7,400 4 6,200 5 – 3,600 Required:Calculate the MIRR of the project using all three methods using these interest rates. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
MIRR Discounting approach % Reinvestment approach % Combination approach %Explanation / Answer
The MIRR is
Discounting approach = 11.90%
Reinvestment approach = 14.52%
Combination approach = 15.70%
The calculations are given below for all the three methods:
Discounting Approach The negative cash flows are discounted back to the present using the required return (discount rate) added to the Initial cost. So PV of - 3600 in the fifth year will be -3600 * PVIF(11,5)= (-)3600*0.5935 = -2137 So Cash flows will be for four years Year Cash flows PVIF @ 10% PV PVIF @ 12% PV 0 -17637 1 6600 0.9091 6000 0.8929 5357 2 7800 0.8264 6446 0.7972 5139 3 7400 0.7513 5560 0.7118 3957 4 6200 0.6830 4235 0.6355 2691 22241 17145 So MIRR = 12 - 492/5096 = 12-0.10 = 11.90% Reinvestment approach: All cash flows other than the initial cost are compounded at the reinvestment rate Year FVIF @ 8% FV 0 -15500 1 6600 1.3605 8979 2 7800 1.2597 9826 3 7400 1.1664 8631 4 6200 1.0800 6696 5 -3600 1.0000 -3600 30532 MIRR = 5(30532/15500)- 1 = 1.1452 -1 =14.52% Combination approach Discounting out flow of 5 th year we get as in the first method $ 2137 and adding to outflow of time '0', we get cash flows as under. Reinvesting cash inflows at 8% and finding MIRR Year FVIF @ 8% FV 0 -17637 1 6600 1.2597 8314 2 7800 1.1664 9098 3 7400 1.0800 7992 4 6200 1.0000 6200 31604 MIRR = 4(31604/17637)- 1 = 1.157 - 1 = 0.157 = 15.7%Related Questions
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