Question

Duo Corporation is evaluating a project with the following cash flows: The company uses an interest rate of 9 percent on all of its projects. Calculate the MIRR of the project using the discounting approach. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Calculate the MIRR of the project using the reinvestment approach. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Calculate the MIRR of the project using the reinvestment approach. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Calculate the MIRR of the project using the combination approach. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

The MIRR calculation helps in evaluating investment decisions. If a firm's cost of capital is less than the investment's return rate, the investment might be acceptable. The value of a bond is affected by the discount rate with higher rates resulting in a lower present value.

Step-by-step explanation:

The Modified Internal Rate of Return (MIRR) is an important financial metric used in capital budgeting to assess the profitability of potential investments. It is an improvement over the traditional Internal Rate of Return (IRR) because it accounts for the cost of capital and the reinvestment rate of cash flows from the project. There are different approaches to calculate MIRR, such as the discounting approach, the reinvestment approach, and the combination approach.

When evaluating an investment decision like the one in the question - whether a firm should invest in a project that offers a 6% rate of return when the cost to borrow is 8% - we consider the available cash and the firm's cost of capital. If the firm has the cash and does not need to borrow, it should compare the investment's rate of return against its opportunity cost, which is what the funds could earn elsewhere, potentially at the firm's cost of capital. If the firm's cost of capital is less than 6%, the investment could be considered. However, if the firm's cost of capital is higher than 6%, it should not make the investment.

For a two-year bond with an 8% interest rate, we would want to calculate the present value of its cash flows. If the discount rate is the same as the bond's interest rate (8%), we discount future cash flows at this rate. If the discount rate rises to 11%, the present value of the bond will decrease since we are discounting future cash flows at a higher rate.