The Caffeine Coffee Company uses the modified internal rate of return. The firm
ID: 2803373 • Letter: T
Question
The Caffeine Coffee Company uses the modified internal rate of return. The firm has a cost of capital of 10 percent. The project being analyzed is as follows ($40,000 investment): Use Appendix A and Appendix Bfor an approximate answer but calculate your final answer using the formula and financial calculator methods.
What is the modified internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
The Caffeine Coffee Company uses the modified internal rate of return. The firm has a cost of capital of 10 percent. The project being analyzed is as follows ($40,000 investment): Use Appendix A and Appendix Bfor an approximate answer but calculate your final answer using the formula and financial calculator methods.
Explanation / Answer
We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.
A=20000(1.1)^2+18000(1.1)^1+13000
=$57000
MIRR=[Future value of inflows/Present value of outflows]^(1/time period)-1
=(57000/40,000)^(1/3)-1
=12.53%(Approx)
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