In: Finance
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 ?
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.