Question

The project has projected cash flows as follows. The cost of capital (k) is 10% and the payback period is 2.8 years. Should the project be accepted under the mirr decision method?

Year. Cash flow

0. -100,000

1. 40,000

2. ??

3. 50,000

Answer 1

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

100,000=40000+x+(50000*0.8)(Where x=cash flow for year 2)

cash flow for year 2=100,000-40000-40000

=$20000

We use the formula:
A=P(1+r/100)^n
where
A=future value of inflows
P=present value
r=rate of interest
n=time period.

A=40000*(1.1)^2+20000(1.1)+50000

=$120400

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

=[120400/100,000]^(1/3)-1

which is equal to

=6.38%Approx

Hence since MIRR is less than the cost of capital;project must be rejected.