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.

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.

A)7.62 percent, accept 
B)7.62 percent, reject 
C)47.09 percent, accept 
D)47.09 percent, reject

Quizplus · Accepted Answer

To compute MIRR, we need to find the future value (FV) of all cash inflows at the end of Year 4 using the reinvestment rate which is the cost of capital (12%).

The calculation for FV of cash inflows is as follows:

FV = CF4*(1+12%)^3 + CF3*(1+12%)^2 + CF2*(1+12%) + CF1 = 4,633.17

Next, we need to find the present value (PV) of all cash outflows at the beginning of the project using the cost of capital (12%).

The calculation for PV of cash outflows is as follows:

PV = CF0 + CF1/(1+12%) + CF2/(1+12%)^2 + CF3/(1+12%)^3 + CF4/(1+12%)^4 = -3,000

Now, we can compute the MIRR using the FV of cash inflows and the PV of cash outflows:

MIRR = [(FV/PV)^(1/n) - 1] x 100% = [(4,633.17/-3,000)^(1/4) - 1] x 100% = 7.62%

Since the MIRR is less than the cost of capital (12%), we should reject the project. Therefore, the best choice is B.

Compute the MIRR for Project Y and Accept or Reject