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Your Company is considering Project called Delimited, whose costs and cash flows are shown below: (5 points) Year Cash Flow 0 -$2,000 1 1,000 2 800 3 850 4 1,300 The project is risky; the firm's cost of capital is 10 percent
Your Company is considering Project called Delimited, whose costs and cash flows are shown below: (5 points)
Year Cash Flow
0 -$2,000
1 1,000
2 800
3 850
4 1,300
The project is risky; the firm's cost of capital is 10 percent. What is the modified internal rate of return (MIRR) and what is your recommendation to accept or reject the project. The required rate of return is 16%
Expert Solution
MIRR= (Future Value of Cash Inflows / Present Value of Cash Outflow)^(1 / Time Period) - 1
here,
Future value of cash inflow:
Year 1:
FV = PV*(1+r)^n
FV = 1000* (1+0.10)^3
= $ 1,331
Year 2
FV = 800* (1+0.10)^2
= $968
Year 3
FV = 850* (1+0.10)^1
=$935
Year 4
FV = $1300
Total Value =$ 1,331+ $968+ $935+ $1300
= $4,534
Present value of outflow = $2000
So,
MIRR= (4,534/ 2000)^ (1/4)- 1
= 0.22705 or 22.71%
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