Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively.
 

             
Time: 0 1 2 3 4 5
Cash flow: −$260,000 $60,800 $79,000 $131,000 $117,000 $76,200
 


Use the MIRR decision rule to evaluate this project.

Expert Solution
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Step 1: Formula.

MIRR means Modified Internal rate of return.

It is calculated as follows:-


MIRR = open square brackets fraction numerator F V space o f space p o s i t i v e space c a s h space f l o w s over denominator P V space o f space n e g a t i v e space c a s h space f l o w s end fraction close square brackets to the power of 1 over n end exponent - 1 

where

FV = future value

PV = present value

n= time period


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