Suppose your firm is considering investing in a project with the cash flows show
ID: 2713241 • Letter: S
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. Time: 0 1 2 3 4 5 6 Cash flow –$15,100 $2,900 $4,100 $3,300 $3,300 $3,100 $2,900 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? Rejected Accepted
Explanation / Answer
Here assuming the reinvestment rate is 9%
MIRR=(terminal cash flows/initial investment)^(1/n)-1
Terminal cash flows = (2900/1.09^5)+(4100/1.09^4)+(3300/1.09^3)+(3300/1.09^2)+(3100/1.09^1)+(2900/1.09^0)
=$24,722.82
MIRR=(24722.28/15100)^(1/5)-1
=8.56%
The project should be rejected as rate is lesser than the required rate of 9%
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