Bernstein's proposed project has an initial cost of $128,600 and cash flows of $64,500,$98,300,and −$15,500 for Years 1 to 3 respectively.If all negative cash flows are moved to Time 0 at a discount rate of 10 percent,what is the modified internal rate of return?
A)10.00 percent
B)9.82 percent
C)10.04 percent
D)9.69 percent
E)9.97 percent

Question

Quizplus · Accepted Answer

To calculate the modified internal rate of return, we need to move all negative cash flows to time 0.

Initial cost = -$128,600 
Year 1 cash flow = $64,500 
Year 2 cash flow = $98,300 
Year 3 cash flow = -$15,500

Moving year 3 cash flow to time 0: 
Year 3 cash flow / (1+0.10)^3 = -$11,864.46

Now, we can calculate the modified internal rate of return using the following formula:

NPV = 0 = -$128,600 + $64,500/(1+r) + $98,300/(1+r)^2 - $11,864.46/(1+r)^3

Using trial and error or Excel's IRR function, we get the modified internal rate of return to be 9.82%, which is option B.

Bernstein's Proposed Project Has an Initial Cost of $128,600 and Cash