CH 11 FINANCE. 4. IRR and MIRR Aa Aa Calvert Construction is analyzing a highly

Question

CH 11 FINANCE.

4. IRR and MIRR Aa Aa Calvert Construction is analyzing a highly profitable project with the following cash flows: 0 2 4 -$8,000 $4,500 $4,500 $3,000 $3,000 The project has the same risk as the firm's average project. Calculate the project's IRR. 34.35% 25.46% 27.89% 36.61% 31.48% Some managers think the "expected rate of return" on the project will be overstated if they use the IRR method They think that intermediate cash flows received from the project can only be reinvested at the firm's WACC of 18.0%. Calculate this project's MIRR. O 25.04% 23.53% O 26.0696 23.03% 27.57%

Explanation / Answer

1.

Let irr be x%
At irr,present value of inflows=present value of outflows.

8000=4500/1.0x+4500/1.0x^2+3000/1.0x^3+3000/1.0x^4

Hence x=IRR=34.35%(Approx)

2.

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

Hence

A=4500(1.18)^3+4500(1.18)^2+3000(1.18)^1+3000

=$20199.444

MIRR=[Future value of inflows/Present value of outfflows]^(1/time period)-1

=[$20199.444/8000]^(!/4)-1

=26.06%(Approx)

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