Question

A project will cost $95,000 today and there will be an additional cost in year 3 of $15,000.  The project will have the following projected cash flows:

            Yr                                Cash Flow

            1                                  $30,000

            2                                  $50,000

            3                                  $0

            4                                  $50,000

The discount rate is 14%.  Calculate the modified internal rate of return.  Do you accept or reject?  (Must have correct set-up and your answer should be between two consecutive whole percentages.)

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A В C D 1 2 Cash Flow Year -$95,000.00 3 0 $30,000.00 4 1 $50,000.00 5 2 -$15,000.00 6 $50,000.00 7 4 9 Discount rate 14% 10 Modified internal rate of 10.97% return (MIRR) 11 12 Reject 13 Decision 14 15 C LC CC

Cell reference -

А В C 1 2 Cash Flow Year -95000 0 1 4 30000 2 50000 -15000 6 50000 4 7 0.14 9 Discount rate 10 Modified internal rate of return (MIRR) MIRR(C3: C7,C9,C9) 11 12 Reject 13 Decision 14 15 dс st LC LC

Please note: Project has been rejected because it's modified IRR is less than its required return (discount rate).

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.