Question

Solo Corp. is evaluating a project with the following cash flows: Year Cash Flow -$28,000 10,200 12,900 14,800 11,900 - 8,400 1 2 3 4 The company uses an interest rate of 9 percent on all of its projects Calculate the MIRR of the project using the discounting approach. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) MIRR % Calculate the MIRR of the project using the reinvestment approach. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) MIRR Calculate the MIRR of the project using the combination approach. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) MIRR

Answer 1

discounting approach :

In the discounting approach, we find the value of all cash outflows to time 0 at the discount rate, while any cash inflows remain at the time at which they occur. So, the discounting the cash outflows to time 0, we find:

Time 0 cash outflow : -$28,000 - $8,400/(1.09)^5 = - $ 33,456.4

so, MIRR using discounting approach is :

0 = - $ 33,456.4 + $10,200/(1 + MIRR)^1 + $12,900 / (1+ MIRR) ^2 + $14,800 / (1 + MIRR)^3 + $11,900 / (1 + MIRR)^4

MIRR = 17.40 %

Reinvestment Approach :

In the reinvestment approach, we find the future value of all cash except the initial cash flow at the end of the project using the reinvestment rate. So, the reinvesting the cash flows to time 5, we find:
Time 5 cash flow = $10,200 * ( 1.09 )^4 + $12,900 * ( 1.09 )^3 + $14,800 * (1.09)^2 + $11,900 * (1.09)^1 - $8,400
= $ 53,258.89
So, MIRR using reinvestment approach is :

0 = - $ 28,00 + $53,258.89 / (1 + MIRR)^5
MIRR = ($53,258.89 / $28,000)^1/5 - 1 = 0.1329 = 13.29%

Combination approach:

In the combination approach, we find the value of all cash outflows at time 0 using the discount rate, and the value of all cash inflows at the end of the project using the reinvestment rate.
So, the value of cash flows is "

time 0 cash out flow = - $28,00 - $8,400 / (1.09)^5 = - $ 33,459.4

time 5 cash in flow = $10,200 * ( 1.09 )^4 + $12,900 * ( 1.09 )^3 + $14,800 * (1.09)^2 + $11,900 * (1.09)^1
= $61,658.89

So, MIRR using combination approach is :
0 = - $33,459.4 + $61,658.89 / (1 + MIRR )^5

MIRR = ($61.658.89 / $33,459.4) ^ 1/5 - 1 = 0.1300 = 13%