Question

Part A

A new project has an initial cost of $142,000. The equipment will be depreciated on a straight-line basis to a book value of $45,000 at the end of the four-year life of the project. The projected net income each year is $14,300, $17,600, $22,400, and $14,200, respectively. What is the average accounting return?

Part B

You are evaluating two projects with the following cash flows:

Year	Project X			Project Y
0	−$540,600			−$511,000
1	219,700			209,400
2	229,600			219,200
3	236,800			227,100
4	196,500			187,900

What is the crossover rate for these two projects?

Part C

A project has the following cash flows :

Year	Cash Flows
0	−$12,300
1	5,470
2	7,900
3	5,280
4	−1,520

Assuming the appropriate interest rate is 9 percent, what is the MIRR for this project using the discounting approach?

Answer 1

a)Average Income =(14300+17600+22400+14200)/4 =17135
Depreciation =(Initial Cost-Book value)/4 =(142000-45000)/4 =24250
Average Investment =( Initial Investment+Final Book value)/2 =(142000+45000)/2 =93500

Average Accounting Return = Average Net Income/Average Book Value =17135/93500 =18.33%

b)Using Excel formula for calculating cross over rate

		A	B	C
	Year	Project X	Project Y	Difference
1	0	-540600	-511000	-29600
2	1	219,700	209,400	10300
3	2	229,600	219,200	10400
4	3	236,800	227,100	9700
5	4	196,500	187,900	8600
			Cross over rate	12.42%
			Formula	IRR(C1:C5)

cross over rate =12.42%
Alternate method Using Financial Calculator
CF0=-29600;CF1=10300;C2=10400;CF3=9700;CF5=8600 CPT IRR
IRR =12.42%

c)
FV of Cash Flows =5470*(1+9%)^3+7900*(1+9%)^2+5280*(1+9%)^1= 22224.9986
PV of Cash Flows =12300+1520/(1+9%)^4 =13376.8063

MIRR=(FV of Cash inflows/PV pf cash outflows)^(1/n)-1 =(22224.9986/13376.8063)^(1/4)-1 =13.53%