Solve both subparts I upvote solution or the cash flow shown below, answer the followinga) Find the EROR by the MIRR method if MARR = 10.5%, in - 8%, and i, = 10%b) Is this project economically justified?$8300$8200S5100$3000S000S1300S1400$2000$5600

Answered: or the cash flow shown below, answer…

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows

Section10.4: Internal Rate Of Return (irr)

Problem 2ST

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Solve both subparts I upvote solution

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%

i_b=interest rate for borrowed funds 8%

i_i= 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 =i_b= 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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