Question

The financial analysists at the world’s largest franchisor of Dog Groomer- Pet Boutiques, “Indiana Bones Temple...

  1. The financial analysists at the world’s largest franchisor of Dog Groomer- Pet Boutiques, “Indiana Bones Temple of Groom” has acquired a large construction firm to assist in opening further boutiques across the nation. The construction division of the world’s large Pet Boutique is deciding whether to undertake the construction of multiple stores. You are faced with evaluating a project which basically offers $500,000 upfront to cover initial costs, and other related costs which continue in years 1-4, followed by revenues downstream which begin to payout in year 5.  

Therefore, the cash flows of this five-year potential construction project under evaluation entails the following cash flows:


Year

Cash Flow Project – Relocation to Chicago, IL

0

+$500,000

1

-$4,000,000

2

-$4,000,000

3

-$4,000,000

4

-$4,000,000

5

+$20,000,000

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The company, Indiana Bones Temple of Groom, uses a more accurate approach to the modified internal rate of return calculation. Remember, in this question, the discount/finance rate = reinvestment rate. All discounting (for all present value operations), i.e. financing rate, takes place at a rate of 10.00%. All compounding (all future value calculations) uses the reinvestment rate of 10.0%. We could say that 10% is the cost of capital. We must use the MIRR due to the non-conventional cash flow stream. Please calculate MIRR (modified internal rate of return) using Method 3 from the text (p. 255-256) and PowerPoint for Chapter 8, otherwise known as the combination approach.

The question: What is the MIRR for Dog Groomer- Pet Boutique “Indiana Bones Temple of Groom”? Please perform calculations.  


A timeline of cash flows or cash flow diagram allows one to see the size and scale of the cash flows: As in the instructions, be sure to include at least one timeline (in each problem), and the general formula for MIRR, if you use the financial calculator, MS Excel or a cell phone app to solve this problem. Feel free to start with this timeline (it is editable in MS word), or use your own. Thank you.


Homework Answers

Answer #1

MIRR Formula = (future value of positive cash flows / present value of negative cash flows) ^ 1/n - 1

Timeline:

MIRR =

therefore, the MIRR of the current project is 10.41%

Calculation =
((20,805,255 / 12,679,461.79) ^ 1/5) - 1 = 10.41%

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