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Totally Serial Enterprises is considering the two mutually exclusive projects below. The cash flows from the projects are summarized below. Year ManBearPig Project Cash Flow Flying Car Cash Flow 0 -$100,000 -$200,000 1 25,000 50,000 2 25,000 50,000 3 50,000 80,000 4 50,000 100,000 What is the Flying Car’s modified internal rate of return (MIRR) at a 12% cost of capital? A. 14.6% B. 12.7% C. 15.9% D. 10.0% E. 13.0%

Sagot :

Answer:

B

Explanation:

The modified internal rate of return is a capital budgeting method used to determine the profitability of an investment. The MIRR assumes that cash inflows are reinvested at the firm's cost of capital and outflows are financed at the firm's financing cost.

MIRR = (Future value of a firm's cash inflow / present value of the firm's cash outflow)^ (1/n)  - 1

n = number of years

present value of the firm's cash outflow = $200,000

Future value of a firm's cash inflow

Future value of year 1's cash flow = 50,000 x (1.12^3) = $70,246.40

Future value of year 2's cash flow = 50,000 x (1.12^2) = $62,720

Future value of year 3's cash flow = 80,000 x (1.12^1) = $89.600

Future value of year 1's cash flow = $100,000

Add the future values together = $322566.40

($322566.40 / $200,000)^0.25 - 1 = 12.7%

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