Question

Consider the following project’s cash flows: Year    End-of-year Cash Flow –\$1,000 -\$2,000 \$2,000 \$1,500 A. What...

Consider the following project’s cash flows:

Year    End-of-year Cash Flow

1. –\$1,000
2. -\$2,000
3. \$2,000
4. \$1,500

A. What is this project’s net present value if the discount rate is 6 percent?

B. What is this project’s internal rate of return?

C. What is this project’s modified internal rate of return if the reinvestment rate is 5 percent?

D. What is this project’s modified internal rate of return if the reinvestment rate is 6 percent?

A)

NPV = Sum of PV all cash flow

PV=CF/(1+r)^n

where CF= cash flow

r=6%

n=year in which cash flow occur

Foe n=1

PV=2000/(1+6%)^1=\$1886.79

 Year Cash flow PV of Cash flow 0 -1000 -1000.00 1 2000 1886.79 2 2000 1779.99 3 1500 1259.43 NPV 3926.21

B)

At internal rate of return ,NPV =0

Let r be internal rate of return

So NPV=0

-1000/(1+r)^0+2000/(1+r)^1+ 2000/(1+r)^2+ 1500/(1+r)^3 =0

Solving for r we get

r=187.66%

C)

Here n=3 years

reinvestment rate =5%

FV of Positive cash flow =2000*(1+5%)^2+2000*(1+5%)^1+1500*(1+5%)^0=\$5805

PV of Cash outflow=-\$1000

MIRR=(5805/-(-1000))^(1/3)-1=79.72%

D)

reinvestment rate =6%

FV of Positive cash flow =2000*(1+6%)^2+2000*(1+6%)^1+1500*(1+6%)^0=\$5867.2

PV of Cash outflow=-\$1000

MIRR=(5867.2/-(-1000))^(1/3)-1=80.36%

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