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 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.

   

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 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.

Explanation / Answer

a>Let A1=1+IRR So at IRR , PV of 1400/A1+2600/(A1^2)+1800/(A1^3)+A1/(1.09^4)+A1/(1.09^5)+A1/(1.09^6)=5200 By Solving we get A=1.055 or 1+IRR=1.055 0r IRR=0.055 or 5% Project not to be accepted as IRRIn case of MIRR , all the inflows are invested @9% FV=1400*(1.09^5)+2600*(1.09^4)+1800*(1.09^3)+1800*(1.09^2)+1600*(1.09^1)+1400 13437.82 PV of this FV @9%=13437.82/(1.09^6) 8012.533 Inflow-Exflow=8012.533-5200 2812.533 Project to be accepted as there is positive NPV

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