Compute the MIRR for Project Y and accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent.
A) 7.62 percent, accept
B) 7.62 percent, reject
C) 47.09 percent, accept
D) 47.09 percent, reject

Question

Compute the MIRR for Project Y and accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent. 
A) 7.62 percent, accept 
B) 7.62 percent, reject 
C) 47.09 percent, accept 
D) 47.09 percent, reject

Quizplus · Accepted Answer

MIRR calculation for Project Y with a cost of capital of 12%:

1. Calculate the future value of all cash inflows at the cost of capital:
CF0 = -$200,000
CF1 = $60,000
CF2 = $80,000
CF3 = $100,000

FV1 = $60,000 / (1+0.12)^1 = $53,571.43
FV2 = $80,000 / (1+0.12)^2 = $61,946.90
FV3 = $100,000 / (1+0.12)^3 = $79,806.31

2. Calculate the initial cost of financing as the present value of all cash outflows:
PV = $200,000

3. Calculate the terminal value of all cash outflows as the future value of the initial cost of financing:
TV = $200,000 x (1+0.12)^3 = $295,936.32

4. Calculate the modified internal rate of return (MIRR):
MIRR = [(TV/PV)^(1/n)]-1 = [(295,936.32/200,000)^(1/3)]-1 = 7.62%

Since the MIRR is less than the cost of capital (12%), we should reject Project Y. Therefore, the answer is B.

Compute the MIRR for Project Y and Accept or Reject