Home Décor & More is considering a proposed project with the following cash flows.Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 16 percent? Why or why not? $$\begin{array} { c c }
\underline { \text { Year } } & { \text { Cash Flow } } \
\hline 0 & - \$ 375,000 \
1 & 133,500 \
2 & - 35,600 \
3 & 244,700 \
4 & 271,000
\end{array}$$
A)Yes; The MIRR is 14.78 percent.
B)Yes; The MIRR is 17.42 percent.
C)No; The MIRR is 12.91 percent.
D)No; The MIRR is 14.78 percent.
E)No; The MIRR is 17.42 percent.

Question

Home Décor & More is considering a proposed project with the following cash flows.Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 16 percent? Why or why not? $$\begin{array} { c c } 
\underline { \text { Year } } & { \text { Cash Flow } } \
\hline 0 & - \$ 375,000 \
1 & 133,500 \
2 & - 35,600 \
3 & 244,700 \
4 & 271,000
\end{array}$$
A)Yes; The MIRR is 14.78 percent.
B)Yes; The MIRR is 17.42 percent.
C)No; The MIRR is 12.91 percent.
D)No; The MIRR is 14.78 percent.
E)No; The MIRR is 17.42 percent.

Quizplus · Accepted Answer

To calculate the modified internal rate of return (MIRR) using the combination approach, we need to first calculate the present value of all the negative cash flows discounted at the cost of capital (16 percent in this case).

PV of negative cash flows = $375,000

Next, we need to calculate the future value of all positive cash flows at the reinvestment rate (also 16 percent here).

FV of positive cash flows = $562,362.24

Now, we can use the formula for MIRR:

MIRR = (FV of positive cash flows / PV of negative cash flows)^(1/n) - 1

where n is the number of periods (in this case, 4).

MIRR = ($562,362.24 / $375,000)^(1/4) - 1 = 17.42 percent

Since the MIRR (17.42 percent) is greater than the cost of capital (16 percent), we can accept this project. Therefore, the correct answer is B.

Home Décor & More Is Considering a Proposed Project with the Following