Question

- 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

Answer #1

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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