SCHOOL OF MANAGEMENT (Department of Accounting & Finance) Corporate Finance (FIN
ID: 2786776 • Letter: S
Question
SCHOOL OF MANAGEMENT (Department of Accounting & Finance) Corporate Finance (FINC 201) QUIZ09 No.15.2012 Prof. Raja Nag Name: SATC CHOHAN Maximum time: 15 minutes Carolina Manufacturing Company is considering a new project that will cost $200,000, last for 3 years and will generate cash-flows of S100,000 in Year 1; S175,000 in Year 2; and $50,000 in Year 3, respectively. Carolina's required rate of return is 11 percent on such projects. Find the (1) payback period, (2) NPV, (8) IRR, and (4) MIRR of this project.Explanation / Answer
1)
Year
Cash flow
‘Cum Cash flow
0
$ (200,000)
$ (200,000)
1
$ 100,000
$ (100,000)
2
$ 175,000
$ 75,000
3
$ 50,000
$ 125,000
Payback Period= 1+100,000/175,000
=1+0.57
=1.57 years
2)
Year
Cash flow
PV Factor ’@ 11%
PV
0
$ (200,000)
1
$ (200,000.00)
1
$ 100,000
0.900900901
$ 90,090.09
2
$ 175,000
0.811622433
$ 142,033.93
3
$ 50,000
0.731191381
$ 36,559.57
NPV
$ 68,683.58
NPV=$68,683.58
3)
Computation of IRR under trial and error method
Let us try with 31%
Year
Cash flow
PV Factor ‘@ 31%
PV
0
$ (200,000)
1.0000
$ (200,000.00)
1
$ 100,000
0.7634
$ 76,335.88
2
$ 175,000
0.5827
$ 101,975.41
3
$ 50,000
0.4448
$ 22,241.09
NPV1
$ 552.38
As NPV is positive let us try with 32%
Year
Cash flow
PV Factor’@ 32%
PV
0
$ (200,000)
1
$ (200,000.00)
1
$ 100,000
0.7576
$ 75,757.58
2
$ 175,000
0.5739
$ 100,436.18
3
$ 50,000
0.4348
$ 21,739.43
NPV2
$ (2,066.81)
IRR= R1+NPV1-(R2-R1)%/NPV1 –NPV2
=31% +$552.38(32-31)%/552.38 –(-2,066.81)
=31% +5.5238 / $ 2,619.19
=31% +0.21%
=31.21%
4)
Year
Cash flow
Formula
FV Factor ‘@ 11%
Terminal Value
1
$ 100,000
(1+0.11)^(3-1)
1.2321
$ 123,210.00
2
$ 175,000
(1+0.11)^(3-2)
1.1100
$ 194,250.00
3
$ 50,000
(1+0.11)^(3-3)
1.0000
$ 50,000.00
Terminal Value
$ 367,460.00
MIRR= Terminal Value / Initial Investment-3 -1
=1.84-3-1
=1.224785468-1
0.224785465
Year
Cash flow
‘Cum Cash flow
0
$ (200,000)
$ (200,000)
1
$ 100,000
$ (100,000)
2
$ 175,000
$ 75,000
3
$ 50,000
$ 125,000
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