A firm with a cost of capital of 10% considers the following capital investment: Cash Flows:...

A firm with a cost of capital of 10% considers the following capital investment:

Cash Flows: Year 0 -4 million Year 1 26.5 Million Year 2 -24.2 Million

(A) According to the IRR given by your financial calculator, should the firm accept this project?

(B) Up to how many IRRs could this project have?

(D) Should the firm accept this project? Justify your answer using the NPV. (Please show work and explain answer)

Solutions

Expert Solution

IRR of project is calculated using excel and screen shot provided below:

Internal Rate of return (IRR) of project is 9.38%.

Since, IRR of project is less than cost of capital, so project cannot be accepted based on IRR.

Project has two cash outflow and one cash inflow. SO, project must has two IRR.

MIRR of project is calculated using excel and screen shot provided below:

Modified Internal Rate of return (MIRR) of project is 10.21%.

Since, MIRR of project is more than cost of capital, so project must be accepted based on MIRR.

Net present value of project at discount rate of 10% is calculated in excel and screen shot provided below:

Net present value of project is $90,909.09.

Since, NPV of project is a positive value, so project must be accepted.

jeff jeffy answered 1 year ago

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