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 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the MIRR decision to evaluate this project; should it be accepted or rejected?

Time

0

1

2

3

4

5

6

Cash Flow

–$

85,000

$

12,000

$

11,000

$

13,000

$

21,000

$

31,000

$

32,000

A.      MIRR = 11.59 PERCENT; ACCEPT THE PROJECT

B.       MIRR = 9.21 PERCENT; REJECT THE PROJECT

C.       MIRR = 7.19 PERCENT; REJECT THE PROJECT

D.      MIRR = 10.58 PERCENT; ACCEPT THE PROJECT

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=12000(1.1)^5+11000(1.1)^4+13000(1.1)^3+21000(1.1)^2+31000(1.1)^1+32000

=$144244.22

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

=[$144244.22/85000]^(1/6)-1

=9.21%(Approx).

Hence since MIRR is less than the required return;project must be rejected.(B).