Compute the MIRR for Project Y and accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent.
$$\begin{array}{l}
\begin{array} {| l | l | l | l | l | l | l |}
\hline\text {Time: }&0&1&2&3&4&5\
\hline\text {Cash flow:}&-5,000&1,000&1,000&0&2,000&2,000\\hline
\end{array}
\end{array}$$
A) 7.62 percent, accept
B) 7.62 percent, reject
C) 47.09 percent, accept
D) 47.09 percent, reject

Question

Compute the MIRR for Project Y and accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent.
$$\begin{array}{l}
\begin{array} {| l | l | l | l | l |  l |  l |}
\hline\text {Time: }&0&1&2&3&4&5\
\hline\text {Cash flow:}&-5,000&1,000&1,000&0&2,000&2,000\\hline
\end{array}
\end{array}$$
A) 7.62 percent, accept
B) 7.62 percent, reject
C) 47.09 percent, accept
D) 47.09 percent, reject

Quizplus · Accepted Answer

The Modified Internal Rate of Return (MIRR) is calculated by finding the future value of the positive cash flows compounded at the project's cost of capital, and then finding the rate that sets the present value of the outflows equal to the future value of the inflows. For Project Y, the future value of the inflows at 12% for 5 years for the $1,000 in years 1 and 2 and $2,000 in years 4 and 5 is $6,328.24. The present value of the outflow is $5,000. Solving for the rate that equates the present value of the outflows to the future value of the inflows over the project's life gives an MIRR of 4.92%, which is lower than the cost of capital of 12%. Therefore, the project should be rejected. However, since none of the provided choices exactly match this calculation, the closest choice based on the methodology and the decision to reject would be based on the principle of rejecting a project when its return is lower than the cost of capital, even though the exact percentage provided in the choices does not match the calculated MIRR.

Compute the MIRR for Project Y and Accept or Reject