Question

Risky Business is looking at a project with the following estimated cash​ flow: Initial investment at start of​ project: ​$11,700,000 Cash flow at end of year​ one: ​$2,106,000 Cash flow at end of years two through​ six: ​$2,340,000 each year Cash flow at end of years seven through​ nine: ​$2,527,200 each year Cash flow at end of year​ ten: ​$1,805,143 Risky Business wants to know the payback​ period, NPV,​ IRR, MIRR, and PI of this project. The appropriate discount rate for the project is 13​%. If the cutoff period is 6 years for major​ projects, determine whether the management at Risky Business will accept or reject the project under the five different decision models.

Answer 1

Payback=1+(11700000-2106000)/2340000=5.1
Payback period: accept

NPV=-11700000+2106000/1.13+2340000/1.13^2+2340000/1.13^3+2340000/1.13^4+2340000/1.13^5+2340000/1.13^6+2527200/1.13^7+2527200/1.13^8+2527200/1.13^9+1805143/1.13^10=845071.967

NPV rule: accept

PI=1+845071.967/11700000=1.072228373

PI rule: accept

IRR:
-11700000+2106000/(1+IRR)+2340000/(1+IRR)^2+2340000/(1+IRR)^3+2340000/(1+IRR)^4+2340000/(1+IRR)^5+2340000/(1+IRR)^6+2527200/(1+IRR)^7+2527200/(1+IRR)^8+2527200/(1+IRR)^9+1805143/(1+IRR)^10=0

=>IRR=14.7624%
IRR rule: accept

MIRR:
=(((2106000/1.13+2340000/1.13^2+2340000/1.13^3+2340000/1.13^4+2340000/1.13^5+2340000/1.13^6+2527200/1.13^7+2527200/1.13^8+2527200/1.13^9+1805143/1.13^10)*1.13^10)/(11700000))^(1/10)-1

=>MIRR=13.791%

MIRR rule: accept