A firm with a 9 percent cost of capital is considering a project
for this year’s capital budget. The project’s expected after-tax
cash flows are as follows:
Year: |
0 |
1 |
2 |
3 |
4 |
Cash flow: |
-$15,000 |
$5,700 |
$4,700 |
$6,900 |
$6,800 |
Calculate the project’s modified internal rate of
return (MIRR).
a. |
60.67% |
|
b. |
20.96% |
|
c. |
28.87% |
|
d. |
16.14% |
|
e. |
12.59% |
We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.
Future value of inflows=5700*(1.09)^3+4700*(1.09)^2+6900*(1.09)+6800
=$27286.7353
MIRR=[Future value of inflows/Present value of outflows]^(1/time period)-1
=[27286.7353/15,000]^(1/4)-1
=16.14%(Approx).
A firm with a 9 percent cost of capital is considering a project for this year’s...
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