Question

Please explain how to answer using a finance calculator, preferably BA II Plus

A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11%. What is the project’s MIRR? What is the project’s PI? What is the project’s payback period? What is the project’s discounted payback period?

Answer 1

1) calculation of payback period:

Payback period = initial cost/ net cash inflows

= 40,000/9000

=4.444 years

2) calculation of discounted payback period

Years	amount	PVF@11%	p.v	cumulative P.V
1	9000	0.9009	8108.1	8108.1
2	9000	0.8116	7304.4	15,412.5
3	9000	0.7312	6580.8	21,993.3
4	9000	0.6587	5928.3	27,921.6
5	9000	0.5935	5341.5	33,263.1
6	9000	0.5346	4811.4	38,074.5
7	9000	0.4817	4335.3	42,409.8
			42299.8

Discounted payback period formula=

= Year before full maturity + unrecovered amount

/discounted cash flow for they year full maturity.

DPB= 6Years +40,000-37,964.5/4335.3

= 6.47 years

3) calculation of the PI

PI= pv of future cash flows/initial investment

= 42,409.8/40000

=1.06

4) calculation of MIRR for the project;-

It is assumed the future cash flows are reinvested at cost of capital.do,we can realise the at the end the project.so,it can be called terminal cash inflows.

Calculation of terminal cash inflows

Here cash flows is uniform ,so,we can use future value annuity to calculate the terminal cash inflows

Terminal cash inflows = 9000 FVAF(11%,6Years) +9000

=9000× 8.7833 +9000

=88,049.7

MIRR= [(terminal cash inflows/ cash outflows)^1/n. ] - 1

= [(88,049.7/40000)]^1/7 -1

= 0.11932

MIRR = 11.932%