Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.
$$\begin{array} { l c c c c c c }
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash Flow } & - \$ 1,000 & \$ 300 & \$ 1,480 & - \$ 500 & \$ 300 & - \$ 100 \
\hline
\end{array}$$
A) The project's MIRR is 14.77 percent and the project should be accepted.
B) The project's MIRR is 9.29 percent and the project should be rejected.
C) The project's MIRR is 13.76 percent and the project should be accepted.
D) The project's MIRR is 15.31 percent and the project should be accepted.

Question

Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.
$$\begin{array} { l c c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash Flow } & - \$ 1,000 & \$ 300 & \$ 1,480 & - \$ 500 & \$ 300 & - \$ 100 \
\hline
\end{array}$$
A) The project's MIRR is 14.77 percent and the project should be accepted.
B) The project's MIRR is 9.29 percent and the project should be rejected.
C) The project's MIRR is 13.76 percent and the project should be accepted.
D) The project's MIRR is 15.31 percent and the project should be accepted.

Quizplus · Accepted Answer

To calculate the MIRR statistic, we need to first calculate the terminal value of all the cash flows at the end of year 5, discounted back to year 0 using the cost of capital:

Terminal value = (300)(1+0.10)^4 + (-100)(1+0.10)^5 = $396.55

Next, we need to find the discount rate that equates the PV of cash inflows to the PV of cash outflows. Using an iterative process, we find that the discount rate that equates the PV of cash inflows (-$402.90) to the PV of cash outflows ($1,000) is 13.76%.

Therefore, the correct answer is C, and we should accept the project as the MIRR (13.76%) exceeds the cost of capital (10%).

Compute the MIRR Statistic for Project J and Advise Whether