Question

Save Homework: HW7 Chapter 11 Score: 0 of 10 pts B11-15 (static) 5 of 74 complete) HW Score: 21.54%, 14 of 65 pts Ousson Help Calculating MRR) OTR Trung Company Info of ong has and any expand whe r e has to barnance o p ere expansion of and repairs to the faculty Dung Years og 10. the project will provide cash rows of m on per year a. Calculate the projects NPV and where the countries 12 percent is the pract a worthwhenvestment based on these two measures? Why or why not? b. Calculate the projects MIRR is the project a worthwe stment based on this measure? Why or why not? a. The projects NPV where the contrate is 12% milion round to two decimal places) Enter your answer in the answer box and then click Check Answer Clear All 4 4 parts remaining

(Calculating MIRR) OTR Trucking Company runs a fleet of long-haul trucks and has recently expanded into the Midwest, where it has decided to build a maintenance facility. This project will require an initial cash outlay of $20 million and will generate annual cash inflows of $4.5 million per year for Years 1 through 3. In Year 4, the project will provide a net negative cash flow of $5 million due to anticipated expansion of and repairs to the facility. During Years 5 through 10, the project will provide cash inflows of $2 million per year.

a. Calculate the project's NPV and IRR where the discount rate is 12

percent. Is the project a worthwhile investment based on these two measures? Why or why not?

b. Calculate the project's MIRR. Is the project a worthwhile investment based on this measure? Why or why not?

Answer 1

Ans a.

NPV = -7143602 (Kindly see below table for more detail)

	0	1	2	3	4	5	6	7	8	9	10
Annual Cashflow	-20000000	4500000	4500000	4500000	-5000000	2000000	2000000	2000000	2000000	2000000	2000000
Discount Rate @ 12%		4500000/1.12	4500000/1.12^2	4500000/1.12^3	-5000000/1.12^4	2000000/1.12^5	2000000/1.12^6	2000000//1.12^7	2000000/1.12^8	2000000/1.12^9	2000000/1.12^10
PV	-20000000	4017857.143	3587372.449	3203011.115	-3177590.392	1134853.711	1013262.242	904698.4307	807766.456	721220.05	643946.4732
NPV = SUM of PV	-7143602

IRR = 0.527% or 0.53% (Kindly see below table for more detail)

IRR is a point where after discount cash inflows and outflows are equal.

Year	0	1	2	3	4	5	6	7	8	9	10
Annual Cashflow	-20000000	4500000	4500000	4500000	-5000000	2000000	2000000	2000000	2000000	2000000	2000000
PV	-20000000	4476409.32	4452942.32	4429598.33	-4895974.14	1948123.05	1937910.26	1927751.01	1917645.02	1907592.01	1897591.71
NPV = SUM of PV	-411.10

Is the project a worthwhile investment based on these two measures? - No

Why or why not? - As project has negative NPV, project with negative NPV should not be accepted. IRR which is only 0.53% which is less than discount rate of 12%.

Ans b -

$\mbox{MIRR}=\sqrt[n]{\frac{FV(\text{positive cash flows, reinvestment rate})}{-PV(\text{negative cash flows, finance rate})}}-1$ ,

Assuming reinvestment rate and cost of debt is 12%

MIRR is 7.20% (Kindly see below table for more detail)

As MIRR is less than discount rate. Considering Discount Rate as Cost of Fund MIRR is less than cost of fund hence project should be rejected.

Year	0	1	2	3	4	5	6	7	8	9	10
Annual Cashflow	-20000000	4500000	4500000	4500000	-5000000	2000000	2000000	2000000	2000000	2000000	2000000
FV of Cash Inflows at 12%		12478854.41	11141834.29	9948066.333		3524683.366	3147038.72	2809856	2508800	2240000	2000000
Sum of FV	49799133
PV of Cash Outflows at 12%	-20000000				-4895974.14
Sum of PV	-24895974
MIRR	7.20%

Thanks and have a good day.