Question

36 points. A project will have an initial after-tax cash outflow, lo, of $14.720. The hurdle rate is 20 percent. The expected free cash inflows will be $4,000/year for years 3-8. a. Find the project's MIRR. b. Using "a", should the project be accepted? Why?

Answer 1

rate positively ..

ans a)
	Computation of IRR
	Year	Cash flow
	0	-14720
	1	0
	2	0
	3	4000
	4	4000
	5	4000
	6	4000
	7	4000
	8	4000
we have to first compute the future value of the cash flow from year 1 to 4
	Year	Cash flow	Future value
	1	0	0
	2	0	0
	3	4000	9953.28	=4000*(1+20%)^5
	4	4000	8294.4	=4000*(1+20%)^4
	5	4000	6912	=4000*(1+20%)^3
	6	4000	5760	=4000*(1+20%)^2
	7	4000	4800	=4000*(1+20%)^1
	8	4000	4000	=4000
	future value		39719.68
	now we have to use financial calculator to compute the MIRR
	Put in calcluator
	PV		-14720
	PMT		0
	FV		39719.68
	N		8
	Compute I		13.21%
	therefore MIRR =			13.21%
ans b)	Project should not be accepted as MIRR is lower than hurdle rate.