Dry-Sand Company is considering investing in a new project. The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax) cash flows for three years. However, at the end of the fourth year, the project will generate -$500,000 of after-tax cash flow due to dismantling costs. Calculate the MIRR (modified internal rate of return) for the project if the cost of capital is 15 percent. The reinvestment rate is 12 percent. Multiple Choice 20.4 percent 11.5 percent 28.2 percent 12.6 percent

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Zviko Zviko · Answer 1 · 2021-04-06T04:09:12+02:00

Answer:

12.6 percent

Explanation:

The First Step is to Calculate the Terminal Value at end of year 4.

Terminal Value (FV) = Sum of (PV x (1 + r) ^ 4 - n)

= $600,000 x (1.15) ^ 3 + $600,000 x (1.15) ^ 2 + $600,000 x (1.15) ^ 1 - $500,000 x (1.15) ^ 0

= $912,525 + $793,500 + $690,000 - $500,000

= $1,896,025

The Next Step is to Calculate the MIRR using CFj Function of a Financial Calculator :

($1,200,000) CFj

0 CFj

$1,896,025 CFj

Now, Shift IRR/Yr we get 12.60 %

Therefore, the MIRR is 12.60 %.