Question

Nichols Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital or negative, in both cases it will be rejected.

Year	0	1	2	3	4	5
Cash flows	−$1,250	$325	$325	$325	$325	$325

a. 11.47%

b. 10.40%

c. 9.43%

d. 10.92%

e. 9.91%

Westwood Painting Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected.

r.	12.25%
Year	0	1	2	3	4
Cash flows	−$850	$300	$320	$340	$360

a. 20.04%

b. 13.42%

c. 16.56%

d. 14.91%

e. 18.22%

Worthington Inc. is considering a project that has the following cash flow data. What is the project's payback?

Year	0	1	2	3
Cash flows	−$500	$150	$200	$300

a. 3.03 years

b. 2.25 years

c. 2.50 years

d. 2.75 years

e. 2.03 years

Answer 1

Let the IRR be x.

Now,

Present Value of Cash Outflows = Present Value of Cash Inflows

1,250 =325 /(1.0x) + 325/ (1.0x)^2 + 325/(1.0x)^3+ 325/(1.0x)^4+ 325/(1.0x)^5

Or x= 9.435%

Hence the IRR is c. 9.43%

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Present Value of Cash Inflows =

= $ 300 * ( 1 + 12.25/100) ^ 1 + $ 320* ( 1 + 12.25/100) ^2 +$ 340 * ( 1 + 12.25/100) ^ 3 +$ 360 * ( 1 + 12.25/100) ^ 4

= $ 988.37

Future Value of Inflows = Present Value of Cash Inflows * (1+rate of Interest/100)^Time

= $ 988.37 * ( 1+ 12.25/100) ^ 4

= $ 1569.15

MIRR=[Future value of inflows/Present value of outflow]^(1/n)-1

= [ $ 1569.15 / $ 850] ^ ( 1/4)-1

= 16.56%

Hence the correct answer is c. 16.56%

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Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 2 + ( 150 / 300)

= 2.50 Years

Hence the correct answer is c. 2.50 Years

Note:

Year	Investment	Cash Inflow	Net Cash Flow
0	-500	-	-500	(Investment + Cash Inflow)
1	-	150	-350	(Net Cash Flow + Cash Inflow)
2	-	200	-150	(Net Cash Flow + Cash Inflow)
3	-	300	150	(Net Cash Flow + Cash Inflow)