Home & More is considering a project with cash flows of-$368,000, $133,500,-$35,600, $244,700, and $258,000 for Years 0 to 4, respectively. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 14.6 percent? Why or why not?
A) Yes; The MIRR is 14.78 percent.
B) Yes; The MIRR is 16.96 percent.
C) Yes; The MIRR is 12.91 percent.
D) No; The MIRR is 14.78 percent.
E) No; The MIRR is 16.96 percent.

Question

Quizplus · Accepted Answer

To calculate the MIRR using the combination approach, we first find the present value of all negative cash flows at the discount rate of 14.6% using the NPV formula:

NPV = (-$368,000/1.146^0) + ($133,500/1.146^1) + (-$35,600/1.146^2) + ($244,700/1.146^3) + ($258,000/1.146^4) 
NPV = -$197,967.03

Next, we find the future value of all positive cash flows at the reinvestment rate of 14.6% using the FV formula:

FV = ($133,500 x 1.146^4) + (-$35,600 x 1.146^3) + ($244,700 x 1.146^2) + ($258,000 x 1.146^1) 
FV = $539,972.84

Finally, we solve for the MIRR using the formula:

MIRR = (FV/PV)^(1/n) - 1 
MIRR = ($539,972.84/-$197,967.03)^(1/4) - 1 
MIRR = 0.1696 or 16.96%

Since the MIRR (16.96%) is greater than the discount rate (14.6%), the project should be accepted. Therefore, the best choice is B.

Home & More Is Considering a Project with Cash Flows