Edelman Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.
A) 9.58%
B) 10.64%
C) 11.82%
D) 13.14%

Question

Edelman Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. 
A) 9.58% 
B) 10.64% 
C) 11.82% 
D) 13.14%

Quizplus · Accepted Answer

Using a financial calculator or Excel, we can solve for the project's MIRR. The cash flows are as follows:
Year 0: -$500,000
Year 1: $150,000
Year 2: $175,000
Year 3: $200,000
Year 4: $225,000
Year 5: $275,000

Using a financial calculator or Excel, we can solve for the project's NPV at the WACC of 10%:
NPV = -$500,000 + $150,000/(1+0.10)^1 + $175,000/(1+0.10)^2 + $200,000/(1+0.10)^3 + $225,000/(1+0.10)^4 + $275,000/(1+0.10)^5 = $163,803.41

Next, we can solve for the project's MIRR by finding the rate that makes the present value of the terminal value (TV) equal to the cost of the project:
TV = $0 = $275,000/(1+MIRR)^5
MIRR = 13.14%

Since the MIRR (13.14%) is greater than the WACC (10%), the project is acceptable. Therefore, the best choice is D.

Edelman Electric Systems Is Considering a Project That Has the Following