Final answer:
To decide on purchasing a project using MIRR, calculate the future value of positive cash flows at the required return rate, then find the rate that equates this to the present value of costs. The project is advisable if the MIRR exceeds the required rate of return.
Step-by-step explanation:
To compute the Modified Internal Rate of Return (MIRR) for a project, we first need to calculate the future value of the positive cash flows at the required rate of return and then use this to determine the MIRR. The project in question has an initial cost of $576,000 and cash flows of $335,000, $70,000, and -$10,650 over the next three years.
Assuming the required rate of return is 14%, we will reinvest the positive cash flows at this rate until the end of the project's lifespan. This means the $335,000 received at the end of the first year will grow for two more years, the $70,000 received at the end of the second year will grow for one more year, and we will subtract the negative cash flow of -$10,650 since it's an outflow at the end of the third year.
The future value (FV) of the cash flows can be calculated as follows:
FV (Year 1) = $335,000 * (1 + 0.14)^2
FV (Year 2) = $70,000 * (1 + 0.14)^1
The total future value of the positive cash flows at the end of year 3 is the sum of these two amounts.
To find the MIRR, we then calculate the rate that makes the present value of the negative cash flows equal the future value of the positive cash flows. If this rate is higher than the required rate of return, the project should be accepted.
Without performing the actual calculations here, as that would require a financial calculator or software, if the MIRR is greater than 14%, the project should be pursued because it exceeds the required return. If it's lower, the project should not be purchased.