Tuna Inc., a large tuna canning firm operating out of Walvis Bay, Namibia, has a new automated production line project it is considering.The project has a cost of R275,000 and is expected to provide after-tax annual cash flows of R73,306 for eight years.The firm's management is uncomfortable with the IRR reinvestment assumption and prefers the modified IRR approach.You have calculated a required rate of return for the firm of 12 percent.What is the project's MIRR?

Question

Quizplus · Accepted Answer

To calculate the MIRR using the modified IRR approach, we need to find the cash flows of the project at the end of the eighth year, using the required rate of return of 12%.

PV of cash inflows = R73,306 * {(1-1/(1+12%)^8)/12%} = R395,814.52
PV of cash outflows = R275,000

Now we need to find the discount rate (r) that equates the present value of the terminal value (TV) of cash inflows and the present value of the cash outflows:

PV(TV) = FCF(8) / (1+r)^8 = PV(inflows)
PV(outflows) = R275,000
TV = PV(inflows) - PV(outflows)

TV = R395,814.52 - R275,000 = R120,814.52

Now solve for r using trial and error or a financial calculator:

NPV = PV(inflows) + PV(TV)

At r = 16%, NPV = -R5,670.89
At r = 15%, NPV = R3,399.25
At r = 14%, NPV = R12,827.19
At r = 13%, NPV = R21,505.06
At r = 12%, NPV = R30,380.55

Therefore, the MIRR of the project using the modified IRR approach is approximately 16.0%. Hence, the best choice is (D).

Tuna Inc, a Large Tuna Canning Firm Operating Out of Walvis