Suppose your firm is considering investing in a project with the cash flows shown as follows,that the required rate of return on projects of this risk class is 8 percent,and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years,respectively. Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?
A) −10.60 percent, reject
B) 10.60 percent, accept
C) −15.33 percent, reject
D) 15.33 percent, accept

Question

Suppose your firm is considering investing in a project with the cash flows shown as follows,that the required rate of return on projects of this risk class is 8 percent,and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years,respectively.  Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?
A) −10.60 percent, reject 
B) 10.60 percent, accept 
C) −15.33 percent, reject 
D) 15.33 percent, accept

Quizplus · Accepted Answer

To evaluate the project using MIRR, we need to calculate the present value of all cash inflows at the project's cost of capital, and then the future value of all outflows at the same rate at the end of the project. Then, we can calculate the MIRR as the discount rate that equates the present value of all cash inflows with the future value of all outflows.

Using a financial calculator or spreadsheet, we get:

PV of cash inflows = -$5,000 + $1,500/(1+0.08)^1 + $3,000/(1+0.08)^2 + $4,000/(1+0.08)^3 = $9,901.68

FV of outflows = $6,000

Then, we can find the MIRR by solving the following equation:

PV of cash inflows x (1 + MIRR)^t = FV of outflows

$9,901.68 x (1 + MIRR)^3 = $6,000

(1 + MIRR)^3 = $6,000 / $9,901.68 = 0.605

1 + MIRR = (0.605)^(1/3)

MIRR = [(0.605)^(1/3)] - 1 = 15.33%

Since the MIRR (15.33%) is greater than the required rate of return (8%), the project should be accepted. The payback and discounted payback criteria are not relevant in this case since they do not consider the time value of money or the cash flows beyond the payback period.

Suppose Your Firm Is Considering Investing in a Project with the Cash