Question
In: Finance
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 8 months agoRelated Solutions
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