Question

Sheridan Automotive is considering adding state safety inspections to its service offerings. The equipment necessary to perform these inspections will cost $585,000 and will generate cash flows of $205,000 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 Sheridan Automotive's project, one must consider the initial investment, annual cash flows, and the cost of capital, compounding the cash flows at that rate and solving for the MIRR.

Step-by-step explanation:

The Modified Internal Rate of Return (MIRR) for Sheridan Automotive's project of adding state safety inspections can be calculated by taking into account the initial outlay and the annual cash flows generated by the investment, along with the cost of capital. The MIRR is a measure that accounts for the cost of capital and differs from the traditional Internal Rate of Return (IRR) by assuming that positive cash flows are reinvested at the firm's cost of capital. To calculate the MIRR, we need to compound the cash flows at the cost of capital to the end of the project's life and then solve for the rate that equates these compounded values to the initial investment. The calculation involves finding the rate at which the present value of the outflows equals the future value of the inflows, which can typically be done using a financial calculator or a spreadsheet application.