Mass Waste Disposal Inc. is considering the construction f a facility at a cost of $20 million. The project will produce positive cash flows of $7 million per year for the next 4 years but the 5th and final year will have a net negative cash flow of $5 million. If the discount rate is 10%, the MIRR of this project is ________ and the project should be ________.

Question

Quizplus · Accepted Answer

To calculate MIRR, we need to find the terminal value of positive cash flows and initial value of negative cash flow at the end of year 4. 
Terminal Value = $7 million / (0.10 - 0.03) * (1 + 0.03)^4 = $32,238,618.07 
Initial Value = $5 million / (1+0.10)^5 = $3,868,562.43 
Total Future Value = -$20,000,000 + $32,238,618.07 - $3,868,562.43 = $7,370,055.64 
MIRR = [(7,370,055.64 / 20,000,000)^(1/5)] - 1 = 8.16%

Since the MIRR is less than the discount rate of 10%, the project should be rejected.