Question #8 (15 pts.)-Your firm is considering a project that will cost $4 milli

Question

Question #8 (15 pts.)-Your firm is considering a project that will cost $4 million up front, generate cash flows of $3.5 million per year for three years, and then have a cleanup and stabilization costs of $100,000 in perpetuity starting at the end of the fourth year. a. How many IRRs does this project have? b. Calculate a modified IRR for this project discounting the outflows and leaving the inflows unchanged. Assume a discount and compounding rate of 10%. C. Using the MIRR and a cost of capital of 10%, would you take the project Show your work in the space below:

Explanation / Answer

IRR:

-4+3.5/(1+IRR)+3.5/(1+IRR)^2+3.5/(1+IRR)^3-0.1/(IRR*(1+IRR)^3)

This has 1 IRR

Modified IRR:
PV of outflows at t=0:-4-0.1/(0.1*1.1^3)=-4.75131
FV of inflows at t=3: 3.5/1.1+3.5/1.1^2+3.5/1.1^3=8.703982

MIRR=(8.703982/4.75131)^(1/3)-1=22.3587%

As MIRR is more than the cost of capital, we will accept the project

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---