Question

A project has projected cash flows of -$148,500, $32,800, $64,200, -$7,500 and $87,300 for years 0 to 4, respectively. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 12.6 percent

Answer 1

Answer:

The project should be rejected since the MIRR of 7.60% is less than the discount rate of 12.60%

Explanation:

Our first task here in order to reach the appropriate decision is to determine the modified internal rate of return using the formula provided below:

MIRR = (Future value of positive cash flows / present value of negative cash flows)^ (1/n) - 1

Note that a positive cash flow receivable in year 1 can be reinvested in years 2,3 and 4(for 3 years)

The positive cash flow receivable in year 2 can be reinvested in years 3 and 4(2 years)

Future value of positive cash flows=$32,800*(1+12.6%)^3+$64,200*(1+12.6%)^2+$87,300*(1+12.6%)^0

Future value of positive cash flows= $215,523.85  

present value of negative cash flows=$148,500+$17,500/(1+12.6%)^3

present value of negative cash flows=$160,758.09

n=4 years

MIRR=($215,523.85/$160,758.09)^(1/4)-1

MIRR=7.60%