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 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 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 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.

Explanation / Answer

CF0 = -14,600

CF1 = 2,400

CF2 = 3,600

CF3 = 2,800

CF4 = 2,800

CF5 = 2,600

CF6 = 2,400

Modified Cash Flows = 2,400 * (1.08)5 + 3,600 * (1.08)4 + 2,800 * (1.08)3 + 2,800 * (1.08)2 + 2,600 * (1.08) + 2,400

Modified Cash Flows = 20,425.26

14,600 = 20,425.26/ (1 + IRR)6

IRR = (20,425.26/ 14,600)1/6

IRR = 5.76%

Since our MIRR decision statistic less than the 8 percent cost of capital, we would reject the project under the MIRR method

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