Question

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 14 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively. Time: 0 1 2 3 4 5 Cash flow: –$290,000 $54,800 $73,000 $119,000 $111,000 $70,200 Use the MIRR decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Should it be accepted or rejected? accepted rejected

Answer 1

MIRR = n√ (Future value of positive cash flow/Present value of negative cash flow) – 1

Computation of FV of cash inflows:

Year	Cash Flow (C)	Computation of FV Factor	FV Factor @ 14 % (F)	PV (C x F)
1	$ 54,800	(1+0.14) ^4	1.68896016	$92,555.016768
2	$ 73,000	(1+0.14) ^3	1.481544	$108,152.712000
3	$ 119,000	(1+0.14) ^2	1.2996	$154,652.400000
4	$ 111,000	(1+0.14) ^1	1.14	$126,540.000000
5	$ 70,200	(1+0.14) ^0	1	$70200.000000
			Total FV	$552,100.128768

MIRR = ($ 552,100.128768/$ 290,000)1/5 – 1

          = (1.903793547476)1/5 – 1= (1.903793547476)0.2 – 1

          = 1.13742814419422 – 1 = 0.13742814419422 or 13.74 %

As MIRR is less than required rate of return of the firm, project should be rejected.