Question

Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent. What is the MIRR on this project? (Do not round intermediate computations. Round final answer to the nearest percent.)

A) 36%
B) 37%
C) 38%
D) 39%

Answer 1

To calculate the MIRR for Turnbull Corp.'s new plant project, the cash flows are compounded to the end of the investment period using the company's cost of capital and then the rate that equates the present value of the costs to this terminal value is solved. The MIRR is found to be 36% (Option A).

Step-by-step explanation:

The Modified Internal Rate of Return (MIRR) for Turnbull Corp.'s project can be calculated by first finding the terminal value of the cash flows at the reinvestment rate, which in this case is equal to the firm's cost of capital (20%). The terminal value of the cash flows at the end of year 3 would be calculated as follows:

• Cash flow for year 1 ($13,000,000) compounded for 2 years: $13,000,000 * (1+0.20)^2
• Cash flow for year 2 ($23,000,000) compounded for 1 year: $23,000,000 * (1+0.20)
• Cash flow for year 3 ($29,000,000) as it is: $29,000,000

Summing these up give us the terminal value.

Next, we calculate the MIRR using the formula which equates the present value of the costs to the future value of the cash inflows. We solve for the MIRR as the rate that makes the present value of the initial investment equal to the terminal value of the cash flows.

Without the intermediate calculations shown, the final MIRR rounded to the nearest percent is 36%.