I only have enough credit for one more question. I am aware that the rule states
ID: 2790418 • Letter: I
Question
I only have enough credit for one more question. I am aware that the rule states you only need to solve a limit of 5 answers. However, in this case there are people who are willing to help answer all of them. If you are one of them, please kindly help me answer all of these questions. Please don't just answer the first question or the five questions, otherwise I'll hit the dislike button. Thank you
MIRR A project has an initial cost of $52,375, expected net cash inflows of $12,000 per year for 9 years, and a cost of capital of 12%. What is the project's MIRR? Round your answer to two decimal places.Explanation / Answer
Answer 1.
Initial Cost = $52,375
Annual Net Cash flows = $12,000
Life of Project = 9 years
Cost of Capital = 12%
Future Value of Net Cash flows = $12,000*1.12^8 + $12,000*1.12^7 + $12,000*1.12^6 + … + $12,000
Future Value of Net Cash flows = $12,000 * (1.12^9 - 1) / 0.12
Future Value of Net Cash flows = $12,000 * 14.77566
Future Value of Net Cash flows = $177,307.92
MIRR = (Future Value of Net Cash flows / Initial Cost)^(1/n) - 1
MIRR = ($177,307.92 / $12,000)^(1/9) - 1
MIRR = 1.3488 - 1
MIRR = 0.3488 = 34.88%
So, MIRR is 34.88%
Answer 2-a.
Project S:
Initial Cost = $10,000
Annual cash flows = $3,500
Life of Project = 5 years
Cost of capital = 14%
NPV = -$10,000 + $3,500/1.14 + $3,500/1.14^2 + $3,500/1.14^3 + $3,500/1.14^4 + $3,500/1.14^5
NPV = $2,015.78
Project L:
Initial Cost = $25,000
Annual cash flows = $8,000
Life of Project = 5 years
Cost of capital = 14%
NPV = -$25,000 + $8,000/1.14 + $8,000/1.14^2 + $8,000/1.14^3 + $8,000/1.14^4 + $8,000/1.14^5
NPV = $2,464.65
Project L should be selected
Answer 2-b.
Project S:
Initial Cost = $10,000
Annual cash flows = $3,500
Life of Project = 5 years
Let IRR be i%
NPV = -$10,000 + $3,500/(1+i) + $3,500/(1+i)^2 + $3,500/(1+i)^3 + $3,500/(1+i)^4 + $3,500/(1+i)^5
0 = -$10,000 + $3,500/(1+i) + $3,500/(1+i)^2 + $3,500/(1+i)^3 + $3,500/(1+i)^4 + $3,500/(1+i)^5
Using spreadsheet, i = 22.11%
So, IRR is 22.11%
Project L:
Initial Cost = $25,000
Annual cash flows = $8,000
Life of Project = 5 years
Let IRR be i%
NPV = -$25,000 + $8,000/(1+i) + $8,000/(1+i)^2 + $8,000/(1+i)^3 + $8,000/(1+i)^4 + $8,000/(1+i)^5
0 = -$25,000 + $8,000/(1+i) + $8,000/(1+i)^2 + $8,000/(1+i)^3 + $8,000/(1+i)^4 + $8,000/(1+i)^5
Using spreadsheet, i = 18.03%
So, IRR is 18.03%
Project S should be selected
Answer 2-c.
Project S:
Initial Cost = $10,000
Future Value of Cash flows = $3,500*1.14^4 + $3,500*1.14^3 + $3,500*1.14^2 + $3,500*1.14 + $3,500
Future Value of Cash flows = $23,135.36
MIRR = (Future Value of Cash flows / Initial Cost)^(1/n) - 1
MIRR = ($23,135.36 / $10,000)^(1/5) - 1
MIRR = 1.1826 - 1
MIRR = 0.1826 = 18.26%
Project L:
Initial Cost = $25,000
Future Value of Cash flows = $8,000*1.14^4 + $8,000*1.14^3 + $8,000*1.14^2 + $8,000*1.14 + $8,000
Future Value of Cash flows = $52,880.83
MIRR = (Future Value of Cash flows / Initial Cost)^(1/n) - 1
MIRR = ($52,880.83 / $25,000)^(1/5) - 1
MIRR = 1.1616 - 1
MIRR = 0.1616 = 16.16%
Project S should be selected
Answer 2-d.
Project S:
Present Value of Cash flows = $3,500/1.14^4 + $3,500/1.14^3 + $3,500/1.14^2 + $3,500/1.14 + $3,500
Present Value of Cash flows = $12,015.78
Profitability Index = Present Value of Cash flows / Initial Cost
Profitability Index = $12,015.78 / $10,000
Profitability Index = 1.20
Project L:
Present Value of Cash flows = $8,000/1.14^4 + $8,000/1.14^3 + $8,000/1.14^2 + $8,000/1.14 + $8,000
Present Value of Cash flows = $27,464.65
Profitability Index = Present Value of Cash flows / Initial Cost
Profitability Index = $27,464.65 / $25,000
Profitability Index = 1.10
Project S should be selected.
On the basis of above analysis and assuming that both projects are mutually exclusive, we should be project L on the basis of NPV method.