Question

An analyst identifies the following cash flows for an average-risk project:

• Year 0 -$5,000
• Year 1-2 $1,900
• Year 3 $2,500
• Year 4 $2,000

22. If the company’s cost of capital is 12%, the project’s discounted payback period is closest to: *

A. 2.5 years

B. 3.0 years

C. 3.9 years

D. None of the above

23. If the company’s cost of capital is 12%, the project’s Modified Internal Rate of Return is closest to: *

A. 14.48%

B. 18.00%

C. 12.48%

D. 18.48%

E. None of the above

Answer 1

22)	B. 3.0 Years
Working:
	Year	Cash flow	Discount factor	Discounted cash flow	Cumulative Discounted cash flow
	x	a	b=1.12^-a	c=a*b	d
	0	-5,000.00	1.000	-5,000.00	-5,000.00
	1	1,900.00	0.893	1,696.43	-3,303.57
	2	1,900.00	0.797	1,514.67	-1,788.90
	3	2,500.00	0.712	1,779.45	-9.45
	4	2,000.00	0.636	1,271.04	1,261.58
	Discounted payback period	=	3+(9.45/1271.04)
				=	3.0
23)	D. 18.48%
Working:
	Year	Cash flow
	0	-5,000.00
	1	1,900.00
	2	1,900.00
	3	2,500.00
	4	2,000.00
	Finance Rate	12%
	Reinvestment Rate	12%
		=mirr(C23:C27,finance rate, reinvestment rate)
		= 18.48%
	Note:
	C23:C27 is the value of cash flow from year 0 to 4.