Question

Mass Waste Disposal Inc. is considering the construction of a facility at a cost of $20 million. The project will produce positive cash flows of $7 million per year for the next 4 years but the 5th and final year will have a net negative cash flow of $5 million. If the reinvestment rate is 10% and the cost of capital is 9%, the MIRR of this project is ________ and the project should be ________. (accepted/rejected) Show all work and explain

no i can not use excel

Answer 1

Step-1

Computation of Future value of Annual Cash Inflows at the end 6th year i.e Final year at reinvestment rate i.e 10%

Step-2

Computation of Present Value of Cash out flows

Step-3

MIRR is rate at which the present value of future value of annual cash inflows (as computed in step-1) is equals to the present value of Cash outflows (as computed in step-2).

Assumed MIRR = r%

Thus, MIRR of the Project is 6.97% and Project should be Rejected because MIRR of the project is less than cost of capital i.e 9% .

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.