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% = <u>$149,583</u>
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.
