Question

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8. Cash flow patterns and the modified rate of return calculation Blue Elk Manufacturing is analyzing...

8. Cash flow patterns and the modified rate of return calculation

Blue Elk Manufacturing is analyzing a project with the following cash flows:

Year

Cash Flow
0 -$1,603,000
1 $325,000
2 $450,000
3 $540,000
4 $360,000

This project has_____________[normal/non-normal] cash flows.

Blue Elk Manufacturing’s WACC is 9.00%. Calculate this project’s modified internal rate of return (MIRR).

A: 2.40%

B: 9.00%

C: 4.40%

D: 8.99%

Blue Elk Manufacturing’s managers select projects based only on the MIRR criterion. Should Blue Elk Manufacturing’s managers accept this independent project?

*Yes

*No

Solutions

Expert Solution

Project
Combination approach
All negative cash flows are discounted back to the present and all positive cash flows are compounded out to the end of the project’s life
Thus year 4 modified cash flow=(420884.43)+(534645)+(588600)+(360000)
=1904129.43
Thus year 0 modified cash flow=-1603000
=-1603000
Discount rate 0.09
Year 0 1 2 3 4
Cash flow stream -1603000 325000 450000 540000 360000
Discount factor 1 1.09 1.1881 1.295029 1.4115816
Compound factor 1 1.295029 1.1881 1.09 1
Discounted cash flows -1603000 0 0 0 0
Compounded cash flows -6.2383E-07 420884.4 534645 588600 360000
Modified cash flow -1603000 0 0 0 1904129.4
Discounting factor (using MIRR) 1 1.043977 1.089887 1.137816 1.1878537
Discounted cash flows -1603000 0 0 0 1603000
NPV = Sum of discounted cash flows
NPV= 4.91273E-08
MIRR is the rate at which NPV = 0
MIRR= 4.40%
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Compounding factor = (1 + reinvestment rate)^(time of last CF-Corresponding period in years)

Reject as MIRR is less than WACC

jeff jeffy answered 6 months ago
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