Los Angeles Lumber Company (LALC) is considering a project with a cost of $1,000 at t = 0 and inflows of $300 at the end of Years 1-5.LALC's cost of capital is 10 percent.What is the project's modified IRR (MIRR)?
A)10.0%
B)12.9%
C)15.2%
D)18.3%
E)20.7%

Question

Quizplus · Accepted Answer

To calculate the MIRR, we need to first calculate the future value (FV) of all cash inflows at the cost of capital (10%).

FV of inflows = $300(1.10)^4 + $300(1.10)^3 + $300(1.10)^2 + $300(1.10)^1 + $300 = $1,720.51

Next, we need to find the discount rate (r) that equates the present value (PV) of the project's costs with the PV of its terminal value, which is calculated as the future value of all cash inflows compounded forward to the end of the project horizon.

PV of costs = -$1,000

PV of terminal value = -$1,720.51/(1+r)^5

Solving for r using a financial calculator or Excel, we get MIRR = 12.9%. Therefore, the best choice is B.

Los Angeles Lumber Company (LALC) Is Considering a Project with a Cost