Question

Drinkable Water Systems is analyzing a project with projected cash inflows of $137,400, $189,300, and -$25,000 for years 1 to 3, respectively. The project costs $236,000 and has been assigned a discount rate of 14 percent. Should this project be accepted based on the discounting approach to the modified internal rate of return? Why or why not? Group of answer choices

Answer 1

Answer:

MIRR is higher than the discount rate, so this project should be profitable and should be accepted.

Explanation:

using the discounting approach to the MIRR:

NPV = 0 = [(-$236,000 - $25,000) / (1 + MIRR)³] + [$137,400 / (1 + MIRR)] + [$189,300 / (1 + MIRR)²]

Using a financial calculator, MIRR = 17.85%

MIRR (17.85%) is higher than the discount rate (14%), so this project should be profitable and should be accepted.

The modified internal rate of return assumes that the initial investment is financed at the interest rate, while the cash generated by the project is reinvested at the firm's WACC.