Question

Boomer Biscuit Inc. needs to automate its production line. The project costs $275,000 and is expected to provide after-tax cash flows of $73,306 for eight years. Management estimates its cost of capital as 12 percent. What is the project’s MIRR? (Do not round intermediate computations. Round final answer to the nearest whole percent.)
A. 14%
B. 16%
C. 18%
D. 12%

Answer 1

Answer:

MIRR = 16%

so correct option is B. 16%

Explanation:

given data

project costs = $275,000

after tax cash flows =  $73,306

time = 8 year

cost of capital = 12 percent

to find out

What is the project’s MIRR

solution

we first find here Future value of annuity that is express as

Future value of annuity = $A * \frac{(1+r)^t - 1}{r}$     ............1

here A is  annuity and r is rate and t is time period

put here value

Future value of annuity = $73306 * \frac{(1+0.12)^8 - 1}{0.12}$

Future value of annuity = 901641.30

so MIRR will be here

MIRR = $(\frac{FV}{PV})^{\frac{1}{t}} - 1$   ................2

here FV is future value and PV is present value and t is time period

put here value

MIRR = $(\frac{901641.30}{275000})^{\frac{1}{8}} - 1$

MIRR = 16%

so correct option is B. 16%