Question

A rm is considering an investment project with the following information: Initial capital expenditure $36 million...

A rm is considering an investment project with the following information:

Initial capital expenditure $36 million

Annual sales (in units) 2 million units

Selling price per unit $20

Cost per unit $10

Project life 3 years Depreciation Straight line, over the life of the project

Working capital Initially (Year 0) the project requires an increase in net working capital of $6 million, but it will be recovered after the project's life (Year 3).

Tax rate 20%

WACC 15%

(a) What are the project's free cash ows in Years 0, 1, 2, and 3?

(b) What is the net present value of the project? 4 MBAD 6152

(c) What is the modied internal rate of return (MIRR) of the project?

(d) What are the problems of the internal rate of return (IRR) criterion? Does MIRR x, or fail to x, those problems?

Please show all work and calculations

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Homework Answers

Answer #1

Solution:-

To Calculate MIRR-

Future Value of Cash Flow
Year Cash Flow WACC Future Value
1 18400000 1.3225 24334000
2 18400000 1.15 21160000
3 24400000 1 24400000
Future Value of cash inflow 69894000

MIRR =

MIRR =

MIRR = 18.50%

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