Question

7.37 For the net cash flow series, (a) determine the number of possible i* values using the two sign tests, (b) find the EROR using the MIRR method with an investment rate of 20% per year and a borrowing rate of 10% per year, and (c) use the MIRR function to find the EROR.

Answer 1

Answer:

The answer is 25.19% .

Note: The values were not stated for the net series cash flows, during my research and i found the complete question and solved it.

Explanation:

From the question given,

The first step is to make use of a table for the net cash flow series

Year                      1                  2                3              4             5             6

Net cash flow    $4100   $2000         $7000         $12000  $700       $800

Then,

Solution : MIRR is defined as modified internal rate of return, It accounts for the positive cash flows with reinvestment by using re-investment rate and negative cash flows are calculated at their present values to keep the fund aside by using finance rate.

As given also reinvestment rate = 20% and finance cost rate = 10%.

Now, from the table given of cash flows, we will calculate the future value of all cash flows in year 6.

FV = 4100*(1+0.20)^5 + 12000*(1+0.20)^2 + 800*(1+0.20)^0 = $28282.11

Now,

By applying the rate of   we will computer teh PV of -ve cash flows :

PV = -2000/(1+0.1)^2 + -7000/(1+0.1)^3 + -700/(1+0.1)^5 = -$7346.73

Now MIRR can be calculated by using the formula , MIRR = \√[n]{FV(positive cash flows/PV of negative cash flows)}-1 = \√[6]{28282.11/7346.74)}-1

MIRR = 1.2519-1 = 0.2519 or 25.19%

Therefore, the only value Possible = 25.19% in this case.