Question

Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown as follows if the

appropriate cost of capital is 10 percent.
Project J
Time
Cash Flow
e
1,000
1
$300
2
$1,480
3
500 $300
Save & Exit
5
100
Submit

Answer 1

To compute the Modified Internal Rate of Return (MIRR) for Project J, we need to calculate the present value of cash inflows and outflows separately and then determine the discount rate that equates the present value of outflows with the future value of inflows.

The cash flows for Project J are as follows:

Time 0: Initial investment: -$1,000

Time 1: Cash inflow: $300

Time 2: Cash inflow: $1,480

Time 3: Cash inflow: $500

Time 5: Cash inflow: $100

First, let's calculate the present value (PV) of outflows (the initial investment):

PV(outflows) = -$1,000 (since it's an outflow at time 0)

Next, let's calculate the future value (FV) of inflows (cash inflows at times 1, 2, 3, and 5):

FV(inflows) = $300 + $1,480 + $500 + $100 = $2,380

Now, we can use the MIRR formula to compute the MIRR statistic:

MIRR = (FV(inflows) / PV(outflows))^(1/n) - 1

Where n is the number of periods (5 in this case).

MIRR = ($2,380 / -$1,000)^(1/5) - 1

MIRR = 1.5189 - 1

MIRR = 0.5189 or 51.89%

Given that the cost of capital is 10 percent, the MIRR is higher than the cost of capital. Therefore, we would advise accepting Project J because the MIRR is greater than the cost of capital, indicating that the project is expected to generate a return higher than the required rate of return.