onsider the topic of capital budgcting. a Suppose the internal rate of return (Q
ID: 2805231 • Letter: O
Question
onsider the topic of capital budgcting. a Suppose the internal rate of return (QIRR) of a cagital Investieht estment projesct is equal to T14 pointst hat is the value of the net presei b. A capital investment project has an initial cost of $15,000 and epesieighted averct o inflows S6,000, $7,000, and $8,000 in the next 3 years, respectively. Ihe p capital (WACC) is 11%. Calculate the net presentvalueN worksheet (NPV) Do not construct an Excel construct an Excel c. Calculate the modified internal rate of return (MIRR). Do not worksheet. d. Explain whether the capital investment project should be accepted or rejected.Explanation / Answer
a)
IRR is the rate at which NPV is zero
=>
when WACC is equal to IRR
NPV =0
b)
NPV = -initial investment + Present value of cash flows
Future value = present value * (1+r)^n
r = interest rate per period
n = number of periods
NPV = -15000 + 6000/1.11 + 7000/1.11^2 + 8000/1.11^3
= 1936.29
c)
future value of cash flows = 6000 *1.11^2 + 7000 * 1.11 + 8000
= 23162.6
MIRR = (fv of cash flows/pv of negative cash flows)^(1/n) -1
= (23162.6/15000)^(1/3) - 1
= 15.58%
d)
It should be accepted since NPV > 0 and MIRR > IRR
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