Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively.
$$\begin{array} { | l | c | c | c | c | c | c | }
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash Flow } & - 125,000 & 65,000 & 78,000 & 105,000 & 105,000 & 25,000 \
\hline
\end{array}$$
Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?
A) 12.00 percent, reject
B) 31.21 percent, accept
C) 54.22 percent, accept
D) 80.67 percent, accept

Question

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively.
$$\begin{array} { | l | c | c | c | c | c | c | } 
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash Flow } & - 125,000 & 65,000 & 78,000 & 105,000 & 105,000 & 25,000 \
\hline
\end{array}$$
Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?
A) 12.00 percent, reject
B) 31.21 percent, accept
C) 54.22 percent, accept
D) 80.67 percent, accept

Quizplus · Accepted Answer

The Modified Internal Rate of Return (MIRR) is a financial metric used to evaluate the attractiveness of investments or projects. It considers the cost of investment, the positive cash flows, and the finance rate or the reinvestment rate. To calculate MIRR for the given project, we need to find the future value of the positive cash flows at the required rate of return (12% in this case), compare it to the initial investment, and solve for the rate that equates these two. The calculation shows an MIRR of 31.21%, which is higher than the required rate of return of 12%. Therefore, the project should be accepted based on the MIRR decision rule.

Suppose Your Firm Is Considering Investing in a Project with the Cash