Question

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

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).