Answer:
IRR = -5.19%
MIRR = 3.33%
The company should reject the project
Step-by-step explanation:
Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested
IRR can be calculated with a financial calculator
Cash flow in year 0 = -$12,000
Cash flow in year 1 = $2,360
Cash flow in year 2 = $4,390
Cash flow in year 3 = $1,520
Cash flow in year 4 = $980
Cash flow in year 5 = $1,250
IRR = 5.19%
The modified internal rate of return is a capital budgeting method used to determine the profitability of an investment. The MIRR assumes that cash inflows are reinvested at the firm's cost of capital and outflows are financed at the firm's financing cost.
MIRR = (Future value of a firm's cash inflow / present value of the firm's cash outflow)^ (1/n) - 1
n = number of years
present value of the firm's cash outflow = $12,000
Future value of a firm's cash inflow
Future value of year 1's cash flow = $2,360 x (1.12^4) = $3,713.51
Future value of year 2's cash flow =$4,390 x (1.12^3) = $6167.63
Future value of year 3's cash flow =$1,520 x (1.12^2) = $1906.69
Future value of year 4's cash flow = $980 X 1.12 = 1097.60
Future value of year 5's cash flow = 1250
Add the future values together = $14,135.43
($14,135.43 / $12,000)^0.2 - 1 = 3.33%
The project should be rejected because the IRR is negative.
To find the IRR using a financial calculator:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. After inputting all the cash flows, press the IRR button and then press the compute button.
