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Chamberlain Corp
Chamberlain Corp. is evaluating a project with the following cash flows:
| Year | Cash Flow |
|---|---|
| 0 | -$15,100 |
| 1 | 6,200 |
| 2 | 7,400 |
| 3 | 7,000 |
| 4 | 5,800 |
| 5 | -3,200 |
The company uses an interest rate of 11 percent on all of its projects. Calculate the MIRR of the project using all three methods. (Do not round intermediate calculations. Show your answers as a percentage rounded to 2 decimal places).
MIRR for:
Discounting approach:
Reinvesting approach:
Combination approach:
Expert Solution
Formula of MIRR:
MIRR=n√FV of cash flowPV of cash outlay−1where:n=number of periodsMIRR=FV of cash flowPV of cash outlayn−1where:n=number of periods
MIRR Discounting Approach
Discounting approach is the exact opposite of the compounding interest.
PV of negative cash flow=15,100+3,200(1.11)5=15,100+1,899.04=16,999.04PV of negative cash flow=15,100+3,200(1.11)5=15,100+1,899.04=16,999.04
The present value of Chamberlain Corp's total negative cash flow is $16,999.04
FV of cashflow=6,200∗(1.11)4+7,400∗(1.11)3+7,000∗(1.11)2+5,800∗(1.11)=9,412.04+10,120.47+8,624.70+6,438=34,595.21FV of cashflow=6,200∗(1.11)4+7,400∗(1.11)3+7,000∗(1.11)2+5,800∗(1.11)=9,412.04+10,120.47+8,624.70+6,438=34,595.21
The future value of Chamberlain Corp's total positive cash flow is $34,595.21
MIRR=5√34,595.2116,999.04−1=5√2.0351−1=1.1527−1=.1527MIRR=34,595.2116,999.045−1=2.03515−1=1.1527−1=.1527
Chamberlain Corp's. MIRR using the discounting approach is 15.27%
MIRR Reinvestment Approach
Its an approach in which the business assumes that the cash flow were reinvested. Since, there are no given reinvestment rate, we will use 11 percent.
FV of cashflow=6,200∗(1.11)4+7,400∗(1.11)3+7,000∗(1.11)2+5,800∗(1.11)−3,200=9,412.04+10,120.47+8,624.70+6,432−3,200=31,395.21FV of cashflow=6,200∗(1.11)4+7,400∗(1.11)3+7,000∗(1.11)2+5,800∗(1.11)−3,200=9,412.04+10,120.47+8,624.70+6,432−3,200=31,395.21
The future value of Chamberlain Corp's total positive cash flow is $31,395.21
MIRR=5√31,395.2115,100−1=5√2.0792−1=1.1577−1=.1577MIRR=31,395.2115,1005−1=2.07925−1=1.1577−1=.1577
Chamberlain Corp MIRR using the reinvestment approach is 15.77%.
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