1 Compute the MIRR for Project Y and accept or reject the pr

1.      Compute the MIRR for Project Y and accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent.

Time:

0

1

2

3

4

5

Cash flow:

?5,000

1,000

1,000

0

2,000

2,000

A.      7.62 PERCENT, ACCEPT

B.      7.62 PERCENT, REJECT

C.      47.09 PERCENT, ACCEPT

D.      47.09 PERCENT, REJECT

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=1000(1.12)^4+1000(1.12)^3+2000(1.12)+2000

=$7218.44736

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

[$7218.44736/5000]^(1/5)-1

=7.62%(Approx).

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