Los Angeles Lumber Company (LALC) is considering a project with a cost of $1,000 at Year 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)?

Question

Quizplus · Accepted Answer

To calculate the MIRR, we need to find the terminal value of the cash inflows first. Using 10% as the discount rate, the terminal value of the cash inflows at the end of Year 5 is $300/(0.10-0.05) = $6,000. Then we calculate the future value of the initial cost using the same discount rate: $1,000 * (1+0.10)^5 = $1,610.51. The MIRR is then the discount rate that equates the present value of the terminal value and the future value of the cost, which is (6,000/1+x)^5 = 1,610.51/(1+x)^5. Solving for x, we get 12.87%. Therefore, the answer is B.

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