Discounting Approach | ||||||
All negative cash flows are discounted back to the present at the required return and added to the initial cost | ||||||
Thus year 0 modified cash flow=-32600-2510.3 | ||||||
=-35110.3 | ||||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -32600.000 | 11520.000 | 14670.000 | 11270.000 | 10940.000 | -4230.000 |
Discounting factor (Using discount rate) | 1.000 | 1.110 | 1.232 | 1.368 | 1.518 | 1.685 |
Discounted cash flows | -32600.000 | 10378.378 | 11906.501 | 8240.527 | 7206.517 | -2510.299 |
Modified cash flow | -35110.299 | 11520.000 | 14670.000 | 11270.000 | 10940.000 | 0.000 |
Discounting factor (using MIRR) | 1.000 | 1.145 | 1.311 | 1.502 | 1.720 | 1.970 |
Discounted cash flows | -35110.299 | 10059.481 | 11186.039 | 7504.007 | 6360.771 | 0.000 |
NPV = Sum of discounted cash flows | ||||||
NPV Reinvestment rate = | 0.00 | |||||
MIRR is the rate at which NPV = 0 | ||||||
MIRR= | 14.52% | |||||
Where | ||||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||
Discounted Cashflow= | Cash flow stream/discounting factor | |||||
Reinvestment Approach | ||||||
All cash flows except the first are compounded to the last time period and IRR is calculated | ||||||
Thus year 5 modified cash flow=(15672.83)+(18479.98)+(13145.33)+(11815.2)+(-4230) | ||||||
=54883.34 | ||||||
Discount rate | 11.000% | |||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -32600.000 | 11520.000 | 14670.000 | 11270.000 | 10940.000 | -4230.000 |
Compound factor | 1.000 | 1.360 | 1.260 | 1.166 | 1.080 | 1.000 |
Compounded cash flows | -32600.000 | 15672.83 | 18479.98 | 13145.33 | 11815.2 | -4230 |
Modified cash flow | -32600.000 | 0 | 0 | 0 | 0 | 54883.340 |
Discounting factor (using MIRR) | 1.000 | 1.110 | 1.232 | 1.367 | 1.517 | 1.684 |
Discounted cash flows | -32600.000 | 0.000 | 0.000 | 0.000 | 0.000 | 32600.000 |
NPV = Sum of discounted cash flows | ||||||
NPV Discount rate = | 0.00 | |||||
MIRR is the rate at which NPV = 0 | ||||||
MIRR= | 10.98% | |||||
Where | ||||||
Compounding factor = | (1 + reinvestment rate)^(time of last CF-Corresponding period in years) | |||||
compounded Cashflow= | Cash flow stream*compounding factor | |||||
Combination approach | ||||||
All negative cash flows are discounted back to the present and all positive cash flows are compounded out to the end of the project’s life | ||||||
Thus year 5 modified cash flow=(15672.83)+(18479.98)+(13145.33)+(11815.2) | ||||||
=59113.34 | ||||||
Thus year 0 modified cash flow=-32600-2510.3 | ||||||
=-35110.3 | ||||||
Discount rate | 11.000% | |||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -32600.000 | 11520.000 | 14670.000 | 11270.000 | 10940.000 | -4230.000 |
Discount factor | 1.000 | 1.110 | 1.232 | 1.368 | 1.518 | 1.685 |
Compound factor | 1.000 | 1.360 | 1.260 | 1.166 | 1.080 | 1.000 |
Discounted cash flows | -32600.000 | 0 | 0 | 0 | 0 | -2510.3 |
Compounded cash flows | 0.000 | 15672.83 | 18479.98 | 13145.33 | 11815.2 | 0 |
Modified cash flow | -35110.300 | 0 | 0 | 0 | 0 | 59113.340 |
Discounting factor (using MIRR) | 1.000 | 1.110 | 1.232 | 1.367 | 1.517 | 1.684 |
Discounted cash flows | -35110.300 | 0.000 | 0.000 | 0.000 | 0.000 | 35110.300 |
NPV = Sum of discounted cash flows | ||||||
NPV= | 0.00 | |||||
MIRR is the rate at which NPV = 0 | ||||||
MIRR= | 10.98% | |||||
Where | ||||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||
Discounted Cashflow= | Cash flow stream/discounting factor | |||||
Compounding factor = | (1 + reinvestment rate)^(time of last CF-Corresponding period in years) | |||||
Compounded Cashflow= | Cash flow stream*compounding factor |
Doak Corp. is evaluating a project with the following cash flows. The company uses a discount...
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