In: Finance
Consider the following project:
Machine A ($10,000) | |
Inflows | |
Year 1 | $4,500 |
Year 2 | 4,500 |
Year 3 | 4,500 |
The IRR for this project is (Write your answer with 2 decimal and as a percentage):
( ? )Given that the firm's cost of capital is 12%, the MIRR for this project is (Write your answer with 2 decimal and as a percentage) ( ? )
The IRR is the discount rate that makes the present value of cash inflows equal to the initial investment.
In the above equation, the value of r is the internal rate of return. It is found by trial and error method.
Let r = 15%
The present value of cash inflows = $10274.51303 ( Higher than $10000)
Let r = 16%
The present value of cash inflows = $ 10106.50293 ( Higher than $10000)
Let r = 17%
The present value of cash inflows = $ 9943.13233 ( Lesser than $ 10000)
IRR is between 16% and 17%
IRR = 16.65%
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The MIRR is calculated using the following equation
If the cash inflows are reinvested at the firm's cost of capital, the terminal value is found to be
MIRR = 14.94%