Question

Please answer the following questions:

1.) The Taxi Co. is evaluating a project with the following cash flows:

Year:Cash Flow

0:-20,400

1:6100

2:5200

3:7950

4:5400

5:-3700

Should this project be accepted based on the PI if the discount rate is 8 percent?

2.) A firm evaluates all of its projects by applying the IRR rule. If the required return is 18 percent, should the firm accept the following project?

Year : Cash Flow

0 : -$105,600

1 : $29,500

2 : $34,200

3 : $6,750

4 : $15,320

5 : $25,670

3.) Consider the following cash flows. If the discount rate is 12 percent, should we accept this project based on the MIRR rule?

Year : Cash Flow

0: -13,024

1: 17,172

2: -36,420

3: 34,200

4: -15,000

5: 8,500

6: 11,300

7: -6820

** Please show steps in financial calculator form. Thank you!

Answer 1

1.

Profitability INdex of project at 8% discount rate is calculated in excel and screen shot provided below:

Profitability Index of project at 8% discount rate is 1.12. Since, Profitability Index of project is more than 1, it mean present value of future cash flows is more than initial investment. So, project should be accepted.

2.

IRR of is calculated in excel and screen shot provided below:

IRR of project is 1.98% and cost of capital is 18%. Since, IRR of project is less than cost of capital, so project cannot be accepted.

3.

MIRR of is calculated in excel and screen shot provided below:

MIRR of project is 10.65% and cost of capital is 12%. Since, MIRR of project is less than cost of capital, so project cannot be accepted.