Question

6) e evaluating a project that requires an initial investm provide the following stream of cash flows. Your cost of es an initial investment of $100.000 and will Your cost of capital is 12%. Year Amount $(10,000) 10,000 (10,000) 40,000 60,000 100,000 (5 pts) Calculate the Modified Internal Rate of Return (MIRR) Show work in Space Below:

Answer 1

Solution to Question no.8:

At IRR ,

Present Value of Cash Outflows = Present Value of Cash Inflows

Let IRR of the project be “x%”

At IRR,

100,000 + 10,000/(1+x)^1 + 10,000/(1+x)^3 = 10,000/(1+x)^2 + 40,000/(1+x)^4 + 60,000/(1+x)^5 + 100,000/(1+x)^6

.

Computing for x , we get x = 12.42%

Therefore , IRR of the project is 12.42%.

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Solution to Question No.6:

Cost of Capital = 12%

Reinvestment rate = IRR = 12.42%

.

Present value of Cash Outflows at Cost of Capital (i.e. 12% ) = 100,000 + 10,000/(1.12^1) + 10,000/(1.12^3)

= $116,046.37

Future value of Cash Inflows at Re-investment rate = 10,000*1.1242^4 + 40,000*1.1242^2 + 60,000*1.1242^1 + 100,000

= $233,977.58

.

MIRR = (Future value of Cash Inflows at Re-investment rate/ Present value of Cash Outflows at Cost of Capital)^(1/No. of years)   - 1

= (233,977.58/116,046.37)^(1/6) – 1

= 1.123976 – 1

= 0.123976

= 12.40%

.

.

Note: Re- investment rate is not given in the question. It is assumed that cash inflows are re invested at IRR.

Solution to Question No.7:

Calculation of Discounted Payback:

Year	Cash Flows	DF Working	Discounting Factor @ 12%	Present Value	Cummulative Value
0	(100,000)	1	1	(100,000)	(100,000)
1	(10,000)	1/1.12^1	0.892857143	(8,929)	(108,929)
2	10,000	1/1.12^2	0.797193878	7,972	(100,957)
3	(10,000)	1/1.12^3	0.711780248	(7,118)	(108,074)
4	40,000	1/1.12^4	0.635518078	25,421	(82,654)
5	60,000	1/1.12^5	0.567426856	34,046	(48,608)
6	100,000	1/1.12^6	0.506631121	50,663	2,055

Therefore , Discounted Pay Back = 5 + 2055/50663

= 5 + 0.04

= 5.04 years