Question

Home and More is considering a project with cash flows of -368000, 133,500, -35600, 244700 and 258000 for year 0 to 4 respectively. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 14.6 percent? why or why not?

Answer 1

Answer:

MIRR is 17.3%

As the MIRR is greater than the Cost of Capital, hence the project must be accepted.

Explanation:

The first step is to find the present value of Cashflows:

Investment Phase Present Value:

Y0 = $368,000  

Return Phase Present Value:

Y1 = $133,500 * 14.6% =                    $119,492

Y2 = ($35,600)  * 14.6% =                 ($27,107)

Y3 = $244,700 * 14.6% =                   $162,585

Y4 = 258,000 * 14.6% =                    $149,583

Total Return Phas Present Value:   $404,553

Now as we know that:

1 + MIRR = (1 + Ke) * (PVR / PVI)^1/n

Here

Ke is 14.6%

PVR is $404,553

PVI is $368,000

n is 4 years duration

By putting values, we have:

1 + MIRR = (1 + 14.6%) * ($404,553 / $368,000)^1/4

1 + MIRR = (1.146) * (1.024)

1 + MIRR = 1.173

MIRR = 1.173  - 1 = 17.3%

As the MIRR is greater than the Cost of Capital, hence the project must be accepted.