Question

QUESTION 19 Malhotra Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC 10.0096 Year0 Cash flows $800 3 $340 $300 $320 $360 a. 17.4296 b. 19.3396 O c. 16.20% d. 21.42% e. 17.07%

Answer 1

Given about Malhotra Inc.'s project,

Initial cost C0 = $800

Cash flow in year 1 CF1 = $300

Cash flow in year 2 CF2 = $320

Cash flow in year 3 CF3 = $340

Cash flow in year 4 CF4 = $360

discount rate d = 10%

MIRR = (FV of future positive cash flows/PV of negative cash flows)^(1/t) - 1

FV of future positive cash flows is calculated using compounding formula

FV of future positive cash flows = CF1*(1+d)^3 + CF2*(1+d)^2+ CF3*(1+d) + CF4

FV of future positive cash flows = 300*1.1^3 + 320*1.1^2 + 340*1.1 + 360 = $1520.50

PV of negative cash flows = C0 = $800

=> MIRR = (1520.50/800)^(1/4) - 1 = 17.42%

Option a is correct.