Buzz Lightyear has been offered an investment in which he expects to receive payments of $4,000 at the end of each of the next 10 years in return for an initial investment of $10,000 now. Enter percentage values to 2 decimals (10.52% entered as 10.52)
a. What is the IRR of the proposed investment? %
b. What is the MIRR of the proposed investment? Assume a cost capital of 10%. %
a.
Let the IRR be x.
Now , Present Value of Cash Outflows=Present Value of Cash Inflows
10,000 = 4000/(1.0x) +4000/ (1.0x)^2 +4000/(1.0x)^3+...............+ $4000/(1.0x)^10
Or x= 38.455%
Hence the IRR is 38.45%
b.
Present Value of Inflows =$ 4000 * 1/(1.1) ^ 1 +$ 4000 * 1/(1.1) ^ 2+$ 4000 * 1/(1.1) ^ 3+..........$ 4000 * 1/(1.1) ^ 10
= $ 24,578.27
Future Value of Inflows = Present Value of Inflows * ( 1+ Rate of Interest ) ^ Time
=$ 24,578.27 * ( 1+10%)^10
= $ 63,749.70249
MIRR=[Future value of inflows/Present value of outflow]^(1/n)-1
= [$63,749.70249 / $ 10,000] ^ (1/10)-1
= 20.35%
Hence the correct answer is 20.35%
Buzz Lightyear has been offered an investment in which he expects to receive payments of $4,000...
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