Question

Your division is considering the following project. It’s WACC is 10%. The project’s after tax flows are as follows:

Project A 0 1 2 3 4

-60$. $15. $25. $25. $30

a. Compute the NPV

b. Compute the IRR

c. Compute the MIRR

d. Compute the discounted payback

Answer 1

Answer a.

WACC = 10%

NPV = -$60 + $15/1.10 + $25/1.10^2 + $25/1.10^3 + $30/1.10^4
NPV = $13.57

Answer b.

Let IRR be i%

NPV = -$60 + $15/(1+i) + $25/(1+i)^2 + $25/(1+i)^3 + $30/(1+i)^4
0 = -$60 + $15/(1+i) + $25/(1+i)^2 + $25/(1+i)^3 + $30/(1+i)^4

Using financial calculator, i = 19.04%

So, IRR of this project is 19.04%

Answer c.

Future Value of Cash Inflows = $15*1.10^3 + $25*1.10^2 + $25*1.10 + $30
Future Value of Cash Inflows = $107.715

MIRR = (Future Value of Cash Inflows / Cash Outflow)^(1/n) - 1
MIRR = ($107.715 / $60)^(1/4) - 1
MIRR = 1.79525^(1/4) - 1
MIRR = 1.1575 - 1
MIRR = 0.1575 = 15.75%

So, MIRR of this project is 15.75%

Answer d.