Question

# Fernando Designs is considering a project that has the following cash flows and WACC data. What...

1. Fernando Designs is considering a project that has the following cash flows and WACC data. What is the project's discounted payback period? (10 points) What is the project’s modified internal rate of return?

WACC: 10.00%

Year                                 0                1                2                3

Cash flows                    -\$900         \$500          \$500          \$500

a.

 Year Cash flows Present value@10% Cumulative Cash flows 0 (900) (900) (900) 1 500 454.55 (445.45) 2 500 413.22 (32.23) 3 500 375.66 343.43(Approx).

Hence discounted Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=2+(32.23/375.66)

=2.09 years(Approx).

b.

Future value of annuity=Annuity[(1+rate)^time period-1]/rate

=\$500[(1.1)^3-1]/0.1

=\$500*3.31

=\$1655

MIRR=[Future value of annuity/Present value of outflows]^(1/time period)-1

=\$[1655/900]^(1/3)-1

=22.51%(Approx).

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