The Fitness Center is considering including a treadmill in this year\'s capital
ID: 2789717 • Letter: T
Question
The Fitness Center is considering including a treadmill in this year's capital budget. The cash outlay for the treadmill is
$ 1 comma 340$1,340.
The firm's cost of capital is
8.7 %8.7%.
After-tax cash flows, including depreciation, are as shown in the following table. Calculate the modified internal rate of return (MIRR) for the project.
End of Year
Cash Flow
1
$ 505
2
505
3
505
4
505
5
505
The PV of all cash outflows is
nothing.
(Round to the nearest cent.)The future value of the cash inflows is
nothing.
(Round to the nearest cent.)The MIRR of the project is
nothing
End of Year
Cash Flow
1
$ 505
2
505
3
505
4
505
5
505
Explanation / Answer
The PV of all cash outflows is=$1340
We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.
Hence
A=505(1.087)^4+505(1.087)^3+505(1.087)^2+505(1.087)^1+505
The future value of the cash inflows is=$3004.27(Approx)
MIRR=[future value of inflows/Present value of outflows]^(1/time period)(-1
=(3004.27/1340]^(1/5)-1
=17.52%(Approx).
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