1 Suppose your firm is considering investing in a project wi

1.      Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively.

Time

0

1

2

3

4

5

Cash Flow

?100,000

30,000

45,000

55,000

30,000

10,000

Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?

Solution

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

Hence future value of inflows=30000*(1.08)^4+45000*(1.08)^3+55000*(1.08)^2+30000*(1.08)+10000

=$204053.7088

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

=[204053.7088/100,000]^(1/5)-1

=15.33%(Approx)

Hence since MIRR is greater than the required return;project must be accepted.