Question

Crystal Industries is considering an expansion project with cash flows of -$287,500, $107,500, $196,100, $104,500, and-$92,700 for Years 0 through 4. Should the firm proceed with the expansion based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent? Why or why not?
A. Yes: The MIRR is 14.45 percent.
B. No: The MIRR is 9.13 percent.
C. No: The MIRR is 11.23 percent.
D. No: The MIRR is 14.45 percent.
E. Yes: The MIRR is 9.13 percent.

Answer 1

Answer:

E. Yes: The MIRR is 9.13 percent.

Explanation:

The First Step is to Calculate the Terminal Value at end of year 4.  

Terminal Value (FV) = Sum of (PV x (1 + r) ^ 5 - n)

                                 = $107,500 x (1.134) ^ 3 + $196,100 x (1.134) ^ 2 + $104,500 x (1.134) ^ 1 + -$92,700 x (1.134) ^ 0  

                                 = $156,764.47 + $252,175,97 + $118,503 - $92,700  

                                 = $434,743.44

The Next Step is to Calculate the MIRR using a Financial Calculator :

- $287,500 CFj

0           CFj

0          CFj

0            CFj

$434,743.44   CFj

Shift IRR/Yr 9.13%

Therefore, the MIRR is 9.13% .