or the cash flow shown below, answer the following a) Find the EROR by the MIRR method if MARR = 10.5%, in - 8%, and i, = 10% b) Is this project economically justified? $8300 $8200 S5100 $3000 S000 S1300 S1400 $2000 $5600
or the cash flow shown below, answer the following a) Find the EROR by the MIRR method if MARR = 10.5%, in - 8%, and i, = 10% b) Is this project economically justified? $8300 $8200 S5100 $3000 S000 S1300 S1400 $2000 $5600
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:or the cash flow shown below, answer the following
a) Find the EROR by the MIRR method if MARR = 10.5%, in - 8%, and i, = 10%
b) Is this project economically justified?
$8300
$8200
S5100
$3000
S000
S1300
S1400
$2000
$5600
Expert Solution
Step 1
The Modified Rate of Return (MIRR) is used to determine the External rate of Return (EROR) where there are multiple interest rates - interest rate for external borrowed funds and interest rate for externally invested cash flows
MARR = 10.5%
ib=interest rate for borrowed funds 8%
ii= investment rate =10%
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
| Cash Inflow | 3000 | 5100 | 1000 | 8200 | 8300 | 1300 |
| Cash Outflow | -5600 | -2000 | -1400 | -5600 |
Step 2
Let us calculate the present value of negative cash flows or cash outflows:
Where,
PV= Present Value of Investment
FV= Future Value of Investment
r = Rate of Interest =ib = 8%
t = Number of years
| Year | 0 | 1 | 2 | 3 | 4 | 5 | Total |
| Cash Inflow | 3000 | 5100 | 1000 | 8200 | 8300 | 1300 | |
| Cash Outflow | -5600 | -2000 | -1400 | -5600 | |||
| Present value @8% | -5185.19 | -2000 | -1400 | -5600 | -14185.2 |
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