Question

Determine if Project B can be included in the capital budget, if the cost of your initial investment is 11% and generates the following cash flows:

    Project B
0 -125
1 20
2 30
3 50
4 50
5 60
       
a. Can be selected as its IRR is 8%.
       
b. Should not be selected, as your IRR is less than the capital cost of the initial investment
       
c. Must not be selected, your MIRR is 10%.
       
d.Can be selected, because it has an NPV of $30.47
       
e. Can be selected because it has a PI of $1.18

Answer 1

Calculation of NPV:

NPV = -$125 + $20/1.11 + $30/1.11^2 + $50/1.11^3 + $50/1.11^4 + $60/1.11^5
NPV = $22.47

Calculation of IRR:

Let IRR be i%

NPV = -$125 + $20/(1+i) + $30/(1+i)^2 + $50/(1+i)^3 + $50/(1+i)^4 + $60/(1+i)^5
0 = -$125 + $20/(1+i) + $30/(1+i)^2 + $50/(1+i)^3 + $50/(1+i)^4 + $60/(1+i)^5

Using financial calculator, i = 16.79%

IRR = 16.79%

Calculation of MIRR:

Future value of cash inflows = $20*1.11^4 + $30*1.11^3 + $50*1.11^2 + $50*1.11 + $60
Future value of cash inflows = $248.495

MIRR = (Future value of cash inflows / Initial investment)^(1/n) - 1
MIRR = ($248.495 / $125)^(1/5) - 1
MIRR = 1.1473 - 1
MIRR = 0.1473 or 14.73%

Calculation of PI:

Present value of cash inflows = $20/1.11 + $30/1.11^2 + $50/1.11^3 + $50/1.11^4 + $60/1.11^5
Present value of cash inflows = $147.47

PI = Present value of cash inflows / Initial investment
PI = $147.47 / $125
PI = 1.18

The project can be selected because it has a PI of 1.18.