Suppose your firm is considering investing in a project with the cash flows shown as follows,that the required rate of return on projects of this risk class is 12 percent,and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years,respectively.
Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?

A)12.00 percent, reject
B)31.21 percent, accept
C)54.22 percent, accept
D)80.67 percent, accept

Question

Suppose your firm is considering investing in a project with the cash flows shown as follows,that the required rate of return on projects of this risk class is 12 percent,and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years,respectively.
Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?

A)12.00 percent, reject 
B)31.21 percent, accept 
C)54.22 percent, accept 
D)80.67 percent, accept

Quizplus · Accepted Answer

To evaluate the project using the MIRR decision rule, we need to calculate the modified internal rate of return (MIRR) and compare it to the required rate of return.

Using a financial calculator or Excel, we can calculate the MIRR as follows:

CF0 = -100,000
CF1-4 = 20,000
I = 12
NPV @ 12 = $11,181.49
FV @ MIRR = -$8,406.48

MIRR = ((FV @ MIRR) / (PV @ 0)) ^ (1 / n) - 1
MIRR = ((-$8,406.48) / $100,000) ^ (1 / 4) - 1
MIRR = 0.3121 or 31.21%

Since the MIRR (31.21%) is greater than the required rate of return (12%), the project should be accepted. Therefore, the best choice is B.

Suppose Your Firm Is Considering Investing in a Project with the Cash