Los Angeles Lumber Company (LALC) is considering a project with a cost of R1,000 at t = 0 and inflows of R300 at the end of Years 1-5.LALC's cost of capital is 10 percent.What is the project's modified IRR (MIRR)?

Question

Quizplus · Accepted Answer

To calculate the MIRR, we need to find the terminal value of the project's inflows at the end of Year 5, discounted back to t = 0 using the cost of capital. Then, we can use the formula for MIRR:

MIRR = [ FV(negative CF, reinvest rate) / PV(positive CF, financing rate) ] ^ (1/n) - 1

1. Find the terminal value of the project:

TV5 = R300*(1+10%)^4 + R300*(1+10%)^3*(1+10%)^1 + R300*(1+10%)^2*(1+10%)^2 + R300*(1+10%)^1*(1+10%)^3 + R300*(1+10%)^0*(1+10%)^4
TV5 = R1,575.63

2. Find the PV of the project's inflows using the cost of capital:

PV = R300/(1+10%)^1 + R300/(1+10%)^2 + R300/(1+10%)^3 + R300/(1+10%)^4 + R300/(1+10%)^5 - R1,000
PV = R539.44

3. Plug in the numbers to the MIRR formula:

MIRR = [ (1,575.63 * (1+MIRR)^5) / (-539.44 * (1+10%)^5) ] ^ (1/5) - 1
MIRR = 12.9%

Therefore, the best choice is B, with a MIRR of 12.9%.

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