Question
In: Finance
DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is...
DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 10%. What is the modified internal rate of return of this project?
Solutions
Expert Solution
| Computation of MIRR | |||||||
| Year | Cash flow | ||||||
| 0 | (750,000.0) | ||||||
| 1 | 350,000.0 | ||||||
| 2 | 325,000.0 | ||||||
| 3 | 150,000.0 | ||||||
| 4 | 180,000.0 | ||||||
| we have to first compute the future value of the cash flow from year 1 to 4 for project | |||||||
| Year | project L | Future value | |||||
| 1 | 350,000.0 | 465850 | 350000*(1+10%)^3 | ||||
| 2 | 325,000.0 | 393250 | 325000*(1+10%)^2 | ||||
| 3 | 150,000.0 | 165000 | 150000*(1+10%) | ||||
| 4 | 180,000.0 | 180000 | 180000 | ||||
| future value | 1204100 | ||||||
| now we have to use financial calculator to compute the MIRR | |||||||
| Put in calcluator | |||||||
| PV | (750,000.0) | ||||||
| PMT | 0 | ||||||
| FV | 1204100 | ||||||
| N | 4 | ||||||
| Compute I | 12.56% | ||||||
| MIRR = | 12.56% |
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