Question

Question 22.22. 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 Question 23.23. 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% Question 24.24. 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

22)
	NPV	$ 78.82
	Working:
	Year	CF	Discount factor		Present Value
	0	$       -1,000	1.0000		$ -1,000.00
	1	$            500	0.9091		$      454.55
	2	$            400	0.8264		$      330.58
	3	$            300	0.7513		$      225.39
	4	$            100	0.6830		$         68.30
		14.5%
		Net Present Value			$         78.82
23)					14.8%
	IRR	14.5%
	working:
	IRR is the rate at which NPV is zero.
	a. Exact IRR through Excel formula
	Year	CF
	0	$       -1,000
	1	$            500
	2	$            400
	3	$            300
	4	$            100
	=	=IRR(C25:C29)
	=	14.5%
	b. Approximate IRR
	Year	CF	Discount factor@10%		Present Value@10%		Discount factor@20%	Present Value@20%
	0	$       -1,000	1.0000		$ -1,000.00		1	$ -1,000.00
	1	$            500	0.9091		$      454.55		0.8333	$      416.67
	2	$            400	0.8264		$      330.58		0.6944	$      277.78
	3	$            300	0.7513		$      225.39		0.5787	$      173.61
	4	$            100	0.6830		$         68.30		0.4823	$         48.23
	NPV				$         78.82			$       -83.72
	IRR	=	10%+(20%-10%)*(78.82/(78.82+83.72))
		=	14.8%
24)
	MIRR	12.11%
	Step-1:Calcualtion of future value of positive cash flows
	Year	CF	Future Value of 1	Future Value of CF
	a	b	c=1.1^(4-a)	d=b*c
	1	$            500	1.3310	$        666
	2	$            400	1.2100	$        484
	3	$            300	1.1000	$        330
	4	$            100	1.0000	$        100
	Total			$    1,580
	Step-2:Calculation of MIRR
	MIRR	=	((Future Value of Positive Cash flows /Present value of negative cash flows)^(1/Life))-1
		=	((1580/1000)^(1/4))-1
		=	12.12%