The Buda Company has an investment that will cost $150,000 at the end of year fo

Question

The Buda Company has an investment that will cost $150,000 at the end of year four there will be an additional investment of $40,000. The firm estimates that the cash flows from the project will be $30,000 at the end of year 1 and these will increase at a rate of 15% per year for the following 5 years and generate cash flows of $40,000 for the last 2 years (8 years total). What is the NPV, MIRR, IRR, and the payback period for the project if the required return is 12%? What is the NPV, MIRR, IRR is the required return was 16%?

Explanation / Answer

When required rate is 12%:

NPV:

MIRR = (Sum of terminanal cash flows/Initial Investment)^1/n = (181823.25/150000)^(1/8) = 4.54%

IRR = that rate at which NPV = 0.

Solving for NPV as 0 we get IRR = 17.28%

Payback Period = 4 + 198.75/52470.19 = 4.004 years

When required rate is 16%:

NPV:

MIRR = (Sum of terminanal cash flows/Initial Investment)^1/n = (156885.76/150000)^(1/8) = 4.46%

IRR shall remain the same since cash flows are not affected by change in required rate.

Year Cash Flows PV Factor @ 12% Present Value 0 -150000 1 -150000 1 30000 0.8929 26785.71 2 34500.00 0.7972 27503.19 3 39675.00 0.5066 20100.59 4 45626.25 0.6355 28996.31 5 52470.19 0.5674 29772.99 6 60340.72 0.5066 30570.48 7 40000 0.4523 18093.97 8 0 0.4039 0.00 NPV 31823.25

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