Suppose your firm is considering investing in a project with the cash flows show

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 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively. Time: 0 1 2 3 4 5 Cash flow –$265,000 $59,800 $78,000 $129,000 $116,000 $75,200 Use the MIRR decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Explanation / Answer

Calculation of MIRR =

The future value of benefits when compounded at 11% is

59800(1.11)4 + 78000(1.11)3 + 129000(1.11)2 + 116000(1.11)1 +75200 = $ 560,357

265000* (1+MIRR)5 = 560,357

(1+MIRR)5 = 560357 / 265000 = 2.1145

(1+MIRR) = (2.1145)1/5 = 1.1615

MIRR = 1.1615 - 1 = 0.1615 = 16.15%

Therefore, MIRR of the Project = 16.15%

Evaluation: MIRR is superior to the regular IRR in two ways. First, the MIRR assumes that project cash flows are reinvested at the cost of capital and problem of multiple rates does not exist with MIRR.

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