Your firm is considering a project that will cost $4.548 million up front, gener

Question

Your firm is considering a project that will cost $4.548 million up front, generate cash flows of $3.50 million per year for 3 years, and then have a cleanup and shutdown cost of $6.00 million in the fourth year a. How many IRRs does this project have? b. Calculate a modified IRR for this project assuming a discount and compounding rate of 10.0%, C. Using the MIRR and a cost of capital of 10.0%, would you take the project? a. How many IRRs does this project have? The project has 2 IRRs. (Select from the drop-down menu.) b. Calculate a modified IRR for this project assuming a discount and compounding rate of 10.0%. The MIRR for this project is | %. (Round to two decimal places.) C. Using the MIRR and a cost of capital of 10.0%, would you take the project? (Select from the drop-down menu.) Yes I, the project should be taken because the MIRR> 10.0%.

Explanation / Answer

MIRR is the rate at which present value of terminal value of cash inflows is equal to the Present value of cash outflows. The terminal value is the future value (FV) of cash inflows and is computed using WACC as the rate of investment. In simpler words, we are comparing one cash inflow (terminal value) with one cash outflow (Present value of outflows). So, first we need to compute one future value of cash inflows.

FV = Amount x (1 + r)n where r is the WACC and n being the no. of years remaining

Now, Present value of terminal value = Present value of cash outflows

or, Terminal Value / (1 + MIRR)4 = $4,548,000 + [ $6,000,000 / (1 + 0.10)4 ]

or, $12,743,500 / (1 + MIRR)4 = $4,548,000 + $4,098,080.732190424

or, (1 + MIRR)4 = 1.473904812449

or, (1 + MIRR) = 1.1018370183

or, MIRR = 0.1018370183 or 10.18%

or, (1 + MIRR) = 1.23710680255

or, MIRR = 0.2371068 or 23.71%

Terminal Value Year Cash Flows Future value 1 $3,500,000 $3,500,000 x (1 + 0.10)3 = $4,658,500 2 $3,500,000 $3,500,000 x (1 + 0.10)2 = $4,235,000 3 $3,500,000 $3,500,000 x (1 + 0.10)1 = $3,850,000 Terminal Value $12,743,500

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