4. Hook Industries is considering a project with a life of 3 years. The initial

Question

4. Hook Industries is considering a project with a life of 3 years. The initial investment is $15,000 with annual cash inflows of $7,000. Assume the Cost of Capital is 9%. Calculate the NPV , the IRR and the MIRR.

(Please show as much work as possible)

            a) NPV________________                                                                                  

          b) IRR________________

            c) MIRR_________________

            d) ADOPT-REJECT DECISION_______________________________________________

Explanation / Answer

a) NPV = -15000 + 7000/1.09 + 7000/1.09^2+ 7000/1.09^3

NPV = $ 2719.06

b)

Using Excel Formula

IRR = rate(nper,pmt,pv,fv)

IRR = rate(3,7000,-15000,0)

IRR = 18.91%

Alternatively

IRR = irr({-15000,7000,7000,7000})

IRR = 18.91%

C)

Future Value of Cash Inflow in year 3 = 7000*(1+9%)^2 + 7000*(1+9%)^1 + 7000

Future Value of Cash Inflow in year 3 = $ 22,946.70

MIRR = (Future Value of Cash Inflow in year 3 / initial investment)^(1/3) -1

MIRR = (22946.70/15000)^(1/3) - 1

MIRR = 15.22%

d) DECISION : Adopt as its IRR is greater than Cost of Capital

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