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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
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
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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
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:

Finance homework question answer, step 2, image 1

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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