Your firm is considering a new investment.The initial cost (today)is $25,000.The project generates year-end annuity cash flows of $15,000 per year for the next two years.If the hurdle rate for the project is 12% and the reinvestment rate is 9%,calculate the MIRR.Is this an acceptable project?

Question

Quizplus · Accepted Answer

The Modified Internal Rate of Return (MIRR) considers both the cost of investment and the interest received on reinvestment of cash. Calculating MIRR involves finding the future value of the cash flows at the reinvestment rate, then finding the rate that sets the present value of those cash flows equal to the initial investment. For this project, the future value of the cash flows at the reinvestment rate of 9% over 2 years is $15,000 * (1.09)^1 + $15,000 = $31,350. The MIRR is the rate that equates the present value of this amount to the initial investment of $25,000 over the project's life span. Solving for the rate gives an MIRR of approximately 10.10%. Since the MIRR (10.10%) is less than the hurdle rate (12%), the project is not acceptable.

Your Firm Is Considering a New Investment