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Project L costs $70,000, its expected cash inflows are $10,000 per year for 8 years, and...

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Finance

Project L costs $70,000, its expected cash inflows are $10,000per year for 8 years, and its WACC is 11%. What is the project'sMIRR? Do not round intermediate calculations. Round your answer totwo decimal places.

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Answer & Explanation Solved by verified expert
3.6 Ratings (520 Votes)

Reinvestment Approach
All cash flows except the first are compounded to the last time period and IRR is calculated
Thus year 8 modified cash flow=(20761.6)+(18704.15)+(16850.58)+(15180.7)+(13676.31)+(12321)+(11100)+(10000)
=118594.34
Discount rate 11.000%
Year 0 1 2 3 4 5 6 7 8
Cash flow stream -70000.000 10000.000 10000.000 10000.000 10000.000 10000.000 10000.000 10000.000 10000.000
Compound factor 1.000 2.076 1.870 1.685 1.518 1.368 1.232 1.110 1.000
Compounded cash flows -70000.000 20761.6 18704.15 16850.58 15180.7 13676.31 12321 11100 10000
Modified cash flow -70000.000 0 0 0 0 0 0 0 118594.340
Discounting factor (using MIRR) 1.000 1.068 1.141 1.219 1.302 1.390 1.485 1.586 1.694
Discounted cash flows -70000.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 69999.999
NPV = Sum of discounted cash flows
NPV Discount rate = 0.00
MIRR is the rate at which NPV = 0
MIRR= 6.81%
Where
Compounding factor = (1 + reinvestment rate)^(time of last CF-Corresponding period in years)
compounded Cashflow= Cash flow stream*compounding factor

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Transcribed Image Text

Project L costs $70,000, its expected cash inflows are $10,000per year for 8 years, and its WACC is 11%. What is the project'sMIRR? Do not round intermediate calculations. Round your answer totwo decimal places.  %

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