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	–$310,000	$50,800	$69,000	$111,000	$107,000	$66,200

  

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

MIRR

Answer 1

              Cash flows will be moved as shown below:

Year	0	1	2	3	4	5
Cash Flow	-$310,000	$50,800	$69,000	$111,000	$117,000	$66,200
Future Value (If Positive)		$50800*(1.08)^4 = $69,112	$69,000*(1.08)^3 = $86920	$111,000*(1.08)^2 =$129,470	$117,000*(1.08)^1 = $126,360	$66200
Sum of FV					$478,062	478,062
Modified CFs	-$310,000				$478,062

With this new set of modified cash flows, the MIRR is:

= -$310,000(1+IRR)^0 + $478,062 (1+IRR)^5

(1+IRR)^5 = $478062/ $310000

1+IRR =  5 th root of1.541

IRR = 1.090-1 = 9.0%

Since our MIRR decision statistic exceeds the 8 percent cost of capital, we would accept the project under the MIRR method.