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aleksklad [387]
3 years ago
8

Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a

project's MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 12.25% Year 0 1 2 3 4 Cash flows -$850 $300 $320 $340 $360
Business
1 answer:
lubasha [3.4K]3 years ago
6 0

Answer:

MIRR = 16.6%

Explanation:

We have the formula to calculate the MIRR of the project:

+) MIRR =\sqrt[n]{\frac{FV}{PV} } - 1

In which:

  • FV - terminal value, the future value of net cash inflow which is assumed to be re-invested at the rate of cost of capital = WACC = 12.25%
  • PV - the present value of the net cash outflows during the investment at the rate of cost of capital = WACC
  • n: numbers of years (n=4)

The future value of net cash inflow Year i = Cash inflow × (1 + Cost of capital)^(number of years reinvested)

= Cash inflow × 1.1225^(n - i)

+) FV1 = 300 * 1.1225^{3} = $424.327

+) FV2 = 320 * 1.1225^{2} = $403.202

+) FV3 = 340 * 1.1225^{1} = $381.65

+) FV4 = 360 * 1.1225^{0} = $360

<em>=> Terminal Value = 424.327 + 403.202 + 381.65 + 360 = $1569.179</em>

<em />

Present Value Year i = \frac{Cash flow}{(1+WACC)^{i} } = \frac{Cash flow}{1.1225^{i} }

The project requires the initial investment = - $850 and there are no cash outflows during 4 years of the project

<em>=> PV of the project = PV Year 0 = </em>\frac{850}{1.1225^{0} }<em> = 850</em>

=> MIRR = \sqrt[4]{\frac{1569.179}{850}}  - 1 =  0.166 = 16.6%

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