Slow Ride Corp. is evaluating a project with the following cash flows: The compa

Question

Slow Ride Corp. is evaluating a project with the following cash flows:

The company uses an interest rate of 10 percent on all of its projects.

Calculate the MIRR of the project using the discounting approach method. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

MIRR % =

Calculate the MIRR of the project using the reinvestment approach method. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

MIRR %=

Calculate the MIRR of the project using the combination approach method. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

MIRR %=

Explanation / Answer

Calculation of MIRR using discounting approach MIRR using discounting approach 20.18% Year Cash Flow Adjusted Flow Total Adjusted Flows Intermediate calculations 0 -28000 -5712.476172 -33712.47617 1 11000 11000 2 13700 13700 3 15600 15600 4 12700 12700 5 -9200 0 PV of -9200 = -9200/1.10^5 Let r be the interest rate which make the net present value of the total adjusted cash flows equals zero The net present value of cash flows can be calculated using the below equation NPV = -033712.48+ 11000/(1+r) + 13700/(1+r)^2 + 15600/(1+r)^3 + 12700/(1+r)^4 Let r = 20%, then LHS of above equation will be = -033712.48+ 11000/(1.20) + 13700/(1.20)^2 + 15600/(1.20)^3 + 12700/(1.20)^4 = -033712.48+ 11000/1.20 + 13700/1.44 + 15600/1.728 + 12700/2.0736 = -033712.48+ 9166.6667 + 9513.8889 + 9027.7778 + 6124.6142 = 120.4713587 Let r = 21%, then LHS of above equation will be = -033712.48+ 11000/(1.21) + 13700/(1.21)^2 + 15600/(1.21)^3 + 12700/(1.21)^4 = -033712.48+ 11000/1.21 + 13700/1.4641 + 15600/1.1771561 + 12700/2.143589 = -33712.4762+ 9090.909091+ 9357.284339 + 8805.793309 + 5924.643729 = -533.845705 r = 0.20 + [(120.4713587) * (0.20-0.21)/(-533.845705-120.4713587)] r = 0.20 + (-1.204713587/-654.3170637) r = 0.20 + 0.0018412 r = 0.20184 or 20.18% (round off) Calculation of MIRR using investment approach MIRR using investment appraoch   = 15.67% reinvestment of positive cash flows done at 10% Year Cash Flow Adjusted Flow Total Adjusted Flows Intermediate calculations 0 -28000 -28000 1 11000 0 FV of 11000 = 11000*1.10^4 = 16105.10 2 13700 0 FV of 13700 = 13700 * 1.10^3 = 18234.70 3 15600 0 FV of 15600 = 15600 * 1.10^2 = 18876 4 12700 0 FV of 12700 = 12700 * 1.10 = 13970 5 -9200 67185.8 57985.8 Total Future value of positive cash flows 67185.8 Let r be the interest rate which makes net present value of the toal adjusted flows equals to zero NPV =-28000 + 57985.80/(1+r)^5 28000 =57985.80/(1+r)^5 (1+r)^5   = 57985.80/28000 2.070921429 1+r =(2.070921429)^(1/5) 1.156731931 r = 1.156731931 - 1 0.156731931 MIRR 15.6731931 or 15.67% Calculation of MIRR using combined approach MIRR using combined appraoch   = 14.79% reinvestment of positive cash flows done at 10% Year Cash Flow Adjusted Flow Total Adjusted Flows Intermediate calculations 0 -28000 -5712.476172 -33712.47617 1 11000 0 FV of 11000 = 11000*1.10^4 = 16105.10 2 13700 0 FV of 13700 = 13700 * 1.10^3 = 18234.70 3 15600 0 FV of 15600 = 15600 * 1.10^2 = 18876 4 12700 0 FV of 12700 = 12700 * 1.10 = 13970 5 -9200 67185.8 67185.8 Total Future value of positive cash flows 67185.8 Let r be the interest rate which makes net present value of the toal adjusted flows equals to zero NPV =-33712.47617 + 67185.80/(1+r)^5 33712.47617 =67185.80/(1+r)^5 (1+r)^5   = 67185.80/33712.47617 1.992906118 1+r =(1.992906118)^(1/5) 1.147882323 r = 1.147882323 - 1 0.147882323 MIRR 14.7882323 or 14.79%

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