Question

CoveAuklaOoglu, Inc. is considering a project which has net cash flows (the same as free cash flows) given below: Year                        CF ($) 0                             -1,000 (Initial Outlay) 1                             500 2                             400 3                             300 4                             100 Given that the company’s WACC is 10%, what is the company’s NPV? (Points : 3.4)        $78.82        $109.45        $49.18        $54.06  Garrod Dickens wants to calculate the IRR for the above project (use information in Question 22) for CoveAuklaOoglu, Inc. His answer would be: (Points : 3.4)        11.8%        14.5%        12.45%        13.02%  Garrod Dickens also wants to calculate the MIRR for the above project (use information in Question 22) for CoveAuklaOoglu, Inc. If the reinvestment rate is the WACC in Question 22, his answer would be: (Points : 3.4)        13.28%        15.07%        10.69%        12.11%

Answer 1

1. NPV:

Year                cash flows       calculation of NPV

1. 500                   =500*1/1.1 = 454.55
2. 400                   =400*1/(1.1)^2 = 330.58
3. 300                  =300*1/(1.1)^3 = 225.39
4. 100                   =100*1/(1.1)^4 = 68.30

                    

            Total = 454.55+330.58+225.39+68.30 = 1078.82

            Less: initial outlay of 1000                      = 1000.00

             NPV                                                            = 78.82

1. IRR:

We can calculate on trial & error basis:

14.5% is the correct answer. We take IRR for which cash flows almost equals zero. Calculations below:

Year              cash flows            calculation of IRR

1. 500                       =500/1.145 = 436.7
2. 400                        =500/(1.145)^2 = 305.1
3. 300                         =500/(1.145)^3 = 199.9
4. 100                        =500/(1.145)^4 = 58.18

TOTAL = 436.7 + 305.1 + 199.9 + 58.18 = 999.8

Less: initial outlay of 1000                        = 1000

                                                                          -0.18

3) MIRR:

                   YEAR     Cash flows     calculation:

1. 500                 =(1+10%)(4-1) = 3.3*500 = 1650
2. 400                  = (1+10%)(4 -2) = 2.2*400 = 880
3. 300                  =(1+10%)(4-3) = 1.1*300 = 330
4. 100                  =(1+10%)(4-4) = 0*100 = 0

              Total = 1650 +880+330 = 2860

=square root of 2860/1000 – 1

=1.691 – 13.28%