Question

Oriole Automotive is considering adding state safety inspections to its service offerings. The equipment necessary to perform these inspections will cost $574,000 and will generate cash flows of $201,000 over each of the next five years. If the cost of capital is 14 percent, what is the MIRR on this project? (Round final answer to 1 decimal place, e.g. 527.5. ) MIRR %

Answer 1

To calculate the MIRR for Oriole Automotive, you would compound the annual cash inflows at the cost of capital and then find the interest rate that equates this value to the initial investment, with all steps properly performed and rounded to one decimal place.

Step-by-step explanation:

The Modified Internal Rate of Return (MIRR) for Oriole Automotive's potential investment in state safety inspections equipment can be calculated by first finding the present value of cash inflows, compounding all cash flows at the project's cost of capital (which is 14%), and then finding the interest rate that equates this compounded value to the initial investment.

Let's calculate the terminal value (TV) by compounding the cash flows:

• Terminal Value (TV) = $201,000 * [(1 + 0.14)5 - 1] / 0.14

Now, to find the MIRR:

• MIRR = (Terminal Value / Initial Investment)1/n - 1
• MIRR = (TV / $574,000)1/5 - 1

You would then calculate these figures to find the MIRR and round the final answer to one decimal place for Oriole Automotive's project.