Suppose your firm is considering investing in a project with the cash flows show

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 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively.

Use the MIRR decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

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 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively.

Explanation / Answer

CF0 = -265,000

CF1 = 59,800

CF2 = 78,000

CF3 = 129,000

CF4 = 116,000

CF5 = 75,200

Modififed Cash Flows = 59,800 * (1.11)4 + 78,000 * (1.11)3 + 129,000 * (1.11)2 + 116,000 * (1.11)+  75,200

Modififed Cash Flows = 560,356.73

265,000 = 560,356.73/ (1 + IRR)5

IRR= (560,356.73/ 265,000)1/5 - 1

IRR = 16.16%

Since our MIRR decision statistic exceeds the 11% cost of capital, we would accept the project under the MIRR method

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