Question

Deckland Corp. is considering a new project that will cost $250,000 to implement. If accepted, it will generate after-tax cash flows of $60,000 in year one, $100,000 in year two, and $120,000 in year three. Deckland is planning on performing a MIRR analysis to determine whether they should accept the project. Their weighted average cost of capital for projects of similar risk is 12%.

Answer 1

Deckland Corp. should perform a MIRR analysis to evaluate the new project's viability, considering its initial cost of $250,000 and expected after-tax cash flows of $60,000, $100,000, and $120,000 in years one, two, and three, respectively, against the 12% weighted average cost of capital.

Step-by-step explanation:

To assess the profitability and feasibility of the new project, Deckland Corp. plans to utilize the Modified Internal Rate of Return (MIRR) analysis.

This method accounts for the project's initial cost, subsequent cash flows, and the weighted average cost of capital (WACC). In this scenario, the WACC of 12% serves as the benchmark for evaluating whether the project's returns exceed the cost of capital.

MIRR analysis considers the timing of cash flows, providing a more accurate reflection of a project's financial attractiveness. By comparing the MIRR to the WACC, Deckland Corp. can make informed decisions regarding the project's acceptance or rejection.