Question

A proposed project is anticipated to cost $170,000 and is anticipated to generate net cash inflows of $29,000 per annum over the next 12 years. Assuming a firm's cost of capital is 8% per annum, what is the modified internal rate of return of this project?

Answer 1

The modified internal rate of return (MIRR) is a financial metric used to assess the profitability of an investment project. It takes into account the cost of capital and the timing of cash flows. In this case, the MIRR of the project is approximately 5.83%.

Step-by-step explanation:

The modified internal rate of return (MIRR) is a financial metric used to assess the profitability of an investment project. It takes into account the cost of capital and the timing of cash flows. To calculate the MIRR, we need to discount the negative cash flows to the present value and compound the positive cash flows to the end of the project.

In this case, the project has an initial cost of $170,000 and generates net cash inflows of $29,000 per year for 12 years. The cost of capital is 8% per year.

To determine the MIRR, we need to find the discount rate at which the present value of the negative cash flows equals the future value of the positive cash flows.

1. Discount the negative cash flows: $170,000 * (1+ 8%)^(-1) = $157,407.41
2. Compound the positive cash flows: $29,000 * (1+ 8%)^(12-1) = $61,917.56
3. Solve for the discount rate that equates the present value of the negative cash flows to the future value of the positive cash flows: MIRR = (61,917.56/157,407.41)^(1/11) - 1 = 5.83%

Therefore, the modified internal rate of return of this project is approximately 5.83%.