Question

In: Finance

A company is planning to start an investment, which will cost an initial investment of $...

A company is planning to start an investment, which will cost an initial investment of $ 15 million. The management has already forecasted all future cash flows from this project: $4 million each year, for the next 6 years. Then the investment (machinery etc) will be sold for a price of $3 million. Calculate the MIRR, knowing that recovered funds will be reinvested at a rate of 12% annual nominal, compounded annually. For the external financing rate, the company uses the MARR. The MARR is 11% annual nominal, compounded annually. Should the company accept this investment or not ?

Solutions

Expert Solution

FV of CFs:

Year Bal Years CF FVF @12% FV of CFs
1 5 $      4.00     1.7623 $      7.05
2 4 $      4.00     1.5735 $      6.29
3 3 $      4.00     1.4049 $      5.62
4 2 $      4.00     1.2544 $      5.02
5 1 $      4.00     1.1200 $      4.48
6 0 $      7.00     1.0000 $      7.00
FV of CFs $   35.46

Thus $ 15 M has become 35.46 M over a period of 6 years by increasing at r%

FV = PV(1+r)^n

35.46 = 15 ( 1 + r)^6

(1+r)^6 = 35.46 / 15

= 2.36

1+r = 2.36 ^ ( 1 / 6)

= 1.1542

r = 0.1542 i.e 15.42%

As r ( 15.42%) > MARR ( 11%) Project can be accepted.


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