Question

Jamaica Corp. is adding a new assembly line at a cost of $8.0 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the project’s Modified Internal Rate of return (MIRR. and should the company add the new assembly line?

a. 18.00 percent, no

b. 18.57 percent, yes

c. 18.57 percent, no

d. 20.38 percent, no

e. 20.38 percent, yes

PLEASE DO NOT SOLVE WITH EXCEL!!

HOW SHOULD I SOLVE IT WITH A FINANCE CALCULATOR OR BY HAND?

Answer 1

You have to use hand. Financial calculator does not have the function to fund the future value of different set of cash flows

Future value of year 1 cash flow = 2 (1 + 0.16)³ = 3.121792

Future value of year 2 cash flow = 3 (1 + 0.16)² = 4.0368

Future value of year 3 cash flow = 4 (1 + 0.16)¹ = 4.64

Future value of year 4 cash flow = 5 (1 + 0.16)⁰ = 5

Future value = 3.121792 + 4.0368 + 4.64 + 5 = 16.7986

MIRR = (Future value / initial cost)^1/n - 1

MIRR = (16.7986 / 8)^1/4 - 1

MIRR = (2.099824)^1/4 - 1

MIRR = 1.2038 - 1

MIRR = 0.2038 or 20.8%

A project having MIRR greater than cost of capital should be accepted.

e. 20.38 percent, yes