Question

If an investment project is described by the sequence of cash flows:

Year	Cash flow
0	-300
1	-900
2	1100
3	500

               

Calculate the MIRR, we will assume a finance rate of 8% and a reinvestment rate of 10%   [5]

Find the IRR (using 7%, 10%, 11%) of an investment having initial cash outflow of $3,000. The cash inflows during the first, second, third and fourth years are expected to be $700, $800, $900 and $1,200 respectively            [5]

(c ) Company X is currently making its capital budgeting decisions for the upcoming year. Among the projects they are considering are two equipment: Equipment A and equipment AA. Equipment A costs $50,000 but will produce expected after-tax cash inflows of $30,000 at the end of each of the next 2 years. Equipment AA also costs $50,000 but will produce expected after tax cash inflows of $16,500 at the end of each of the next 4 years. Both projects have a 12% cost of capital.Assume that these are Mutual excusive projects. Using NPV, Which project or projects should the company accept    [5]

      (d)                     year        CF_X                       

It is now determined that the cost of capital for both projects is 14%. Using IRR, should the Project be selected?       [5]

Answer 1

a) MIRR
MIRR(values, finance_rate, reinvest_rate)
MIRR(-300,-900,1100,500,8%,10%)	14.70%
b)
Year	Cash flow
0	-3000
1	700
2	800
3	900
4	1200
IRR	7.04%
c)
Year	Project A	Project AA	Discount Rate 12%	PV project A	PV project AA
0	-$50,000.00	-$50,000.00	1	-$50,000.00	-$50,000.00
1	$30,000.00	$16,500.00	0.892857143	$26,785.71	$14,732.14
2	$30,000.00	$16,500.00	0.797193878	$23,915.82	$13,153.70
3		$16,500.00	0.711780248	0	$11,744.37
4		$16,500.00	0.635518078	0	$10,486.05
			NPV	$701.53	$116.26
Project A would be selected because it has highest NPV.			IRR