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 13 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively.

  

  

Use the MIRR decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

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 13 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively.

Explanation / Answer

Where

MIRR = ((Sum of future value of cashflows/initial investment outlay)^(1/life of project) – 1)*100

Compounding factor = (1 + discount rate)^(Life of project – corresponding time of cashflow)

Future value of cash flow = Cash flow value * compounding factor

Accept project as MIRR is greater than required rate of 13%

Discount rate =   13.000% Compounding rate= 13.000% Year 0 1 2 3 4 5 Cash flow stream -295000 53800 72000 117000 110000 69200 Discounting factor 1 1.13 1.2769 1.442897 1.630474 1.842435 Discounted cash flows project -295000 47610.62 56386.56 81086.87 67465.06 37558.99 Compounding factor= 2.352605 2.081952 1.842435 1.630474 1.442897 FV of cash flows= 126570.2 149900.5 215564.9 179352.1 99848.47 Sum of FV of cash flows(TV)= 771236.2 MIRR= 21.19

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