Mass Company is investing in a giant crane. It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year cash flow of $3 million each year for three years. At the end of the fourth year, there will be a $1 million disposal cost. Calculate the MIRR for the project if the cost of capital is 12 percent.
A)17.8 percent
B)15.3 percent
C)23.8 percent
D)22.1 percent

Question

Quizplus · Accepted Answer

To calculate the MIRR, we need to find the present value of all the cash flows at the cost of capital, and then find the discount rate that makes the PV of cash inflows equal to the PV of cash outflows.
PV of cash inflows: 
Year 1: $3 million / (1+0.12)^1 = $2.68 million
Year 2: $3 million / (1+0.12)^2 = $2.39 million
Year 3: $3 million / (1+0.12)^3 = $2.13 million
Year 4: -$1 million / (1+0.12)^4 = -$0.56 million (negative sign because it's a cash outflow)
Total PV of cash inflows = $2.68 + $2.39 + $2.13 - $0.56 = $6.64 million

PV of initial investment: 
$6 million / (1+0.12)^0 = $6 million

Total PV of cash outflows = $6 million + $1 million = $7 million

Now we need to find the discount rate that equates the PV of cash inflows with the PV of cash outflows using the MIRR function in Excel or any financial calculator. The MIRR in this case is 17.8%, which is the rate at which the project's NPV would be 0. Therefore, the best choice is A.

Mass Company Is Investing in a Giant Crane