Question

Management of Sycamore Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $211,550 and will generate cash flows of $86,750 over each of the next six years. If the cost of capital is 14 percent, what is the MIRR on this project? (Round intermediate calculations to 4 decimal places, e.g. 1.2514. Round answer to 2 decimal places, e.g. 15.25%.)

Answer 1

Present Value of Cash Inflows = $ 86,750 * 1/(1.14) ^ 1 + $ 86,750 * 1/(1.14) ^ 2 +  $ 86,750 * 1/(1.14) ^ 3 +...+  $ 86,750 * 1/(1.14) ^ 6

= $ 337,341.9071

We use the formula for computing the future value:

future value=present value(1+rate of interest/100)^time period

A=$ 337,341.9071( 1+14/100) ^ 6

= $ 337,341.9071* 2.194972624

= $ 740,456.2510

Hence, MIRR=[Future value of inflows/Present value of outflow]^(1/n)-1

=[$ 740,456.2510/ $211,550] ^ (1/6)-1

= 23.22%

Hence the correct answer is 23.22%