Slow Ride Corp. is evaluating a project with the following cash flows: Year Cash

Question

Slow Ride Corp. is evaluating a project with the following cash flows:

Year Cash Flow

0) –$ 29,800

1)12,000

2)14,700

3) 16,600

4) 13,700

5 ) 10,200

The company uses an interest rate of 9 percent on all of its projects.

Calculate the MIRR of the project using the discounting approach method. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Calculate the MIRR of the project using the reinvestment approach method. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Calculate the MIRR of the project using the combination approach method. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

1. Discounting approach:

In the discounting approach, we find the value of all cash outflows to time 0, while any cash inflows remain at the time at which they occur. So, the discounting the cash outflows to time 0, we find:

Time 0 cash flow = –$29,800

So, the MIRR using the discounting approach is:

0 = -$29,800 + $12,000/(1+MIRR) + $14,700/(1+MIRR)2 + $16,600/(1+MIRR)3 + $13,700/(1+MIRR)4 + $10,200/(1+MIRR)5

Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:

MIRR = 35.56%

2. Reinvestment approach:

In the reinvestment approach, we find the future value of all cash except the initial cash flow at the

end of the project. So, reinvesting the cash flows to time 5, we find:

Time 5 cash flow = $12,000(1.094) + $14,700(1.103) + $16,600(1.102) + $13,700(1.10) + $10,200 = $80,831.37

So, the MIRR using the discounting approach is:

0 = –$29,800 + $80,831.37/(1+MIRR)5

(1+MIRR)5 = $80,831.37/$29,800 = 2.7125

MIRR = 2.71251/5 – 1

MIRR = 1.2209 – 1 = 0.2209 or 22.09%

3. Combination approach:

In the combination approach, we find the value of all cash outflows at time 0, and the value of all

cash inflows at the end of the project. So, the value of the cash flows is:

Time 0 cash flow = -$29,800

Time 5 cash flow = $12,000(1.094) + $14,700(1.103) + $16,600(1.102) + $13,700(1.10) + $10,200 = $80,831.37

So, the MIRR using the discounting approach is:

0 = -$29,800 + $80,831.37/(1+MIRR)5

(1+MIRR)5 = $80,831.37/$29,800 = 2.7125

MIRR = 2.71251/5 – 1

MIRR = 1.2209 – 1 = 0.2209 or 22.09%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.