Old Exam Questions - Capital Budgeting - Solutions
Page 42 of 96 Pages
Year
Cash Flow
0
-$200,000
1
$125,000
2
$150,000
3
-$50,000
4
$125,000
Also assume that the weighted average cost of capital is 12 percent. Determine the
modified internal rate of return (MIRR) for this project.
A.
19.0%
B.
22.0%
C.
21.0%
*
D.
20.0%
E.
23.0%
First, find the present value (at Year 0) of the cash outflows:
PV = [-$200,000 / (1.12)
0
] + [-$50,000 / (1.12)
3
] = -$235,589.01
Second, find the terminal value (at Year 4) of the cash inflows:
TV = (125,000)(1.12)
3
+ ($150,000)(1.12)
2
+ ($125,000)(1.12)
0
TV = $175,616.00 + $188,160.00 + $125,000 = $488,776.00
Third, find the interest rate which equates the two:
N = 4; PV = -235,589.01; FV = 488,776.00; Solve for I/YR = 20.0%
= MIRR
Alternatively,
CFj =
-235,589.01
CFj =
0
CFj =
0
CFj =
0
CFj =
488,776.00
Solve for IRR = 20.0%
39.
Assume that your company is looking at a potential investment project and that the
following information is associated with the project:
Allowable Depreciation
Year
Net
Income*
for 3-Year MACRS Class
1
$50,000
0.33
2
$60,000
0.45