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 –$ 29,100 1 11,300 2 14,000 3 15,900 4 13,000 5 – 9,500 The company uses an interest rate of 8 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)) MIRR % 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)) MIRR % Calculate the MIRR of the project using the combination approach method.

Explanation / Answer

Discounting approach:

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

So, discounting the cash outflows to time 0, we find: Time 0 cash flow = –$29,900 – $9500 / 1.08^5

Time 0 cash flow = –$35565.5403718

So, the MIRR using the discounting approach is:

0 = –$35565.5403718 + $11300 / (1 + MIRR) + $14,000 / (1 + MIRR)^ 2 + $15900 / (1 + MIRR)^3 + $13,000 / (1 + MIRR)^4

Using a financial caculator, MIRR = 14.32%

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 using the reinvestment rate.

So, reinvesting the cash flows to time 5, we find:

Time 5 cash flow = $11,300(1.08^4) + $14,000(1.08^3) + $15,900(1.08^2) + $13,000(1.08) – $9,500

Time 5 cash flow = $56095.253248

So, the MIRR using the discounting approach is:

0 = –$29,100 + $56095.253248 / (1 + MIRR)^5

$56095.253248 / $29,100 = (1 + MIRR)^5

MIRR = ($56095.253248 / $29,100)^1/5 – 1

MIRR = 0.1403, or 14.03%

Combination approach:

In the combination approach, we find the value of all cash outflows at time 0 using the discount rate, and the value of all cash inflows at the end of the project using the reinvestment rate.

So, the value of the cash flows is:

Time 0 cash flow = –$29,100 – $9,500 / 1.08^5

Time 0 cash flow = –$35565.5403718

Time 5 cash flow = $11,300(1.08^4) + $14,000(1.08^3) + $15,900(1.08^2) + $13,000(1.08)

Time 5 cash flow = $65595.253248

So, the MIRR using the discounting approach is: 0 = –$35565.5403718 + $65595.253248 / (1 + MIRR)^5

$65595.253248 / $35565.5403718 = (1 + MIRR)^5

MIRR = ($65595.253248 / $35565.5403718)^1/5 – 1

MIRR = 0.1302, or 13.02%

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