Answer:
The correct option is d. 13.50%.
Explanation:
Note: This question is not complete. The complete question is therefore provided before answering the question. See the attached pdf file for the complete question.
The explanation to the answer is now provided using following steps:
Step 1: Calculation of the present value (PV) of the cash flow of the project
Since the cash flow is $350 for each year, the PV of the project can be calculated using the
formula for calculating the present value of an ordinary annuity as follows:
PV = P * ((1 - (1 / (1 + r))^n) / r) …………………………………. (1)
Where;
PV = Present value of the project = ?
P = Annual cash flow = $350
r = cost of capital = 11%, or 0.11
n = number of years = 3
Substitute the values into equation (1) to have:
PV = 350 * ((1 - (1 / (1 + 0.11))^3) / 0.11)
PV = $855.300150406068
Step 2: Calculation of MIRR of the project
This can be calculated using the following formula:
MIRR = (PV / Outlay)^(1/n) * (1 + r) - 1……………….. (2)
Where;
PV = $855.300150406068
Outlay = Absolute cash outflow = 800
r = cost of capital = 11%, or 0.11
n = number of years = 3
Substitute the values into equation (2) to have:
MIRR = (855.300150406068 / 800)^(1/3) * (1 + 0.11) - 1
MIRR = 0.13500863584805, or 13.500863584805%
Rounding to 2 decimal places, we have:
MIRR = 13.50%
Therefore, the correct option is d. 13.50%.
