Suppose your firm is considering investing in a project with the cash flows show

Question

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 14 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively Time Cash flow$285,000 $55,800 $74,000 $121,000 $112,000 $71.200 Use the MIRR decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) MIRR Should it be accepted or rejected? Accepted Rejected

Explanation / Answer

1) MIRR 14.46% Working: a. Future Value of cash inflows Year Cash inflows Future Value of 1 Future value of cash inflows a b c=1.14^(5-a) d=b*c 1 $         55,800                       1.6890 $                                    94,243.98 2 $         74,000                       1.4815 $                                1,09,634.26 3 $     1,21,000                       1.2996 $                                1,57,251.60 4 $     1,12,000                       1.1400 $                                1,27,680.00 5 $         71,200                       1.0000 $                                    71,200.00 Total $                                5,60,009.83 b. Present Value of cash outflows Present Value of cash outflows $                                2,85,000.00 c. MIRR = ((Future Value of Cash inflows / Present Value of cash outflows)^(1/Life in years))-1 = ((560009.83/285000)^(1/5))-1 = 14.46% 2) It should be: Accepted MIRR is more than Required rate of return.So, it should be accepted.

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