Question

Sheakley Industries is considering expanding its current line of business and has developed the following expected cash flows for the project. Should this project be accepted based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent? Why or why not?

Year: Cash Flow

0 -385000

1 67,500

2 246,100

3 164,500

4 -22,700

Group of answer choices

No; The MIRR is 12.00 percent.

Yes; The MIRR is 7.59 percent.

No; The MIRR is 10.79 percent.

Yes; The MIRR is 10.79 percent.

No; The MIRR is 10.11 percent.

Answer 1

Future value of cash inflows = (67,500 * 1.134^3) + (246100 * 1.134^2) + (164,500 * 1.134^1)
= $601,450.2736

Present value of cash outflows = 385,000 + (22700 / 1.134^4) = $398,726.937

MIRR = (Future value of cash inflows / Present value of cash outflows)^(1/n) - 1
= ($601,450.2736 / $398,726.937)^(1/4) - 1
= 1.1079 - 1
= 10.79%

MIRR = 10.79%

Modified internal rate of return is less than the discount rate. Thus, project should not be accepted.

No; The MIRR is 10.79%