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is considering adding state safety inspections to its service offerings. The equipment necessary to perform these...

is considering adding state safety inspections to its service offerings. The equipment necessary to perform these inspections will cost $512,000 and will generate cash flows of $179,000 over each of the next five years. If the cost of capital is 18 percent, what is the MIRR on this project?

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Answer #1

MIRR = ( FVc / PVfc )1/n -1

where, FVc is the  future value of positive cash flows

and PVfc is the present value of negative cash flows

CF0 = -512000
CF1 = 179000
CF2 = 179000
CF3 = 179000
CF4 = 179000
CF5 = 179000

Cost of capital = r = 18%

PVfc = 512000

FVc = ΣCFn(1+r)t = 179000*1.184 + 179000*1.183 + 179000*1.182 + 179000*1.18 + 179000 = 1280603.55

n is the cash flow in year n and t is the years to maturity

Hence, MIRR = (1280603.55/512000)1/5 - 1 = 0.2012 or 20.12%

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