In: Finance
|
||
|
||
|
||
|
|
||
|
||
|
||
|
Part A:
NPV :
NPV is the difference between Present value of Cash Inflows and
Present value of cash outflows.
NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/
Rejected.
NPV < 0 , Project will be rejected.
Year | CF | PVF @8 % | Disc CF |
0 | $ -3,000,000.00 | 1.0000 | $ -3,000,000.00 |
1 | $ 750,000.00 | 0.9259 | $ 694,444.44 |
2 | $ 750,000.00 | 0.8573 | $ 643,004.12 |
3 | $ 750,000.00 | 0.7938 | $ 595,374.18 |
4 | $ 750,000.00 | 0.7350 | $ 551,272.39 |
5 | $ 750,000.00 | 0.6806 | $ 510,437.40 |
6 | $ 750,000.00 | 0.6302 | $ 472,627.22 |
NPV | $ 467,159.75 |
Option A is correct.
Part B:
Modified IRR:
It is similar to IRR. In IRR, we are assumed that intermediary
cashflows are reinvested at IRR only. In MIRR, we assume that
Intermediary CFs are reinvested at Reinvestment Rate rather than at
IRR. Convert all cash flows in to Future value using reinvestment
rate and calculate the growth rate between Current Value and Future
value.
That growth rate is MIRR.
Year | Bal Years | CF | FVF @7 % | FV of CFs |
1 | 7 | $ 400,000.00 | 1.6058 | $ 642,312.59 |
2 | 6 | $ 700,000.00 | 1.5007 | $ 1,050,511.25 |
3 | 5 | $ 1,100,000.00 | 1.4026 | $ 1,542,806.90 |
4 | 4 | $ 1,700,000.00 | 1.3108 | $ 2,228,353.22 |
5 | 3 | $ 1,800,000.00 | 1.2250 | $ 2,205,077.40 |
6 | 2 | $ 1,500,000.00 | 1.1449 | $ 1,717,350.00 |
7 | 1 | $ 900,000.00 | 1.0700 | $ 963,000.00 |
8 | 0 | $ 300,000.00 | 1.0000 | $ 300,000.00 |
Future Value of CFs | $ 10,649,411.36 |
Thus $5500000 has become $10649411.36 over a period of 8
Years
Future Value = Cash Flow * ( 1 + r )^n
$ 10649411.36 = $ 5500000 ( 1 + r) ^ 8
( 1 + r) ^ 8 = $10649411.36 / $ 5500000
( 1 + r) ^ 8 = 1.9363
( 1 + r) = 1.9363 ^ ( 1 / 8 )
( 1 + r) = 1.0861
r = 1.0861 -1
r = 0.0861
i.e MIRR is 8.61 %
Modified IRR is 8.61%
Option D is correct.