The construction division of the world’s largest Piercing Boutique is deciding whether to undertake the construction of multiple stores. You are faced with evaluating a project, which offers $500,000 upfront to cover initial costs, and other related costs, which continue in years 1-4, followed by revenues downstream, which begin, to payout in year 5. The company uses the Combination Approach to solve for MIRR. (Modified Internal Rate of Return) 10% = Cost of Capital Discount/Finance rate = Reinvestment rate The Cash Flow: Year Cash Flow Project – Relocation to Chicago, IL 0 +$500,000 1 -$4,000,000 2 -$4,000,000 3 -$4,000,000 4 -$4,000,000 5 +$20,000,000
The construction division of the world’s largest Piercing Boutique is deciding whether to undertake the construction of multiple stores. You are faced with evaluating a project, which offers $500,000 upfront to cover initial costs, and other related costs, which continue in years 1-4, followed by revenues downstream, which begin, to payout in year 5. The company uses the Combination Approach to solve for MIRR. (Modified Internal Rate of Return) 10% = Cost of Capital Discount/Finance rate = Reinvestment rate The Cash Flow: Year Cash Flow Project – Relocation to Chicago, IL 0 +$500,000 1 -$4,000,000 2 -$4,000,000 3 -$4,000,000 4 -$4,000,000 5 +$20,000,000
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 23P
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The construction division of the world’s largest Piercing Boutique is deciding whether to undertake the construction of multiple stores. You are faced with evaluating a project, which offers $500,000 upfront to cover initial costs, and other related costs, which continue in years 1-4, followed by revenues downstream, which begin, to payout in year 5.
The company uses the Combination Approach to solve for MIRR. (Modified
10% = Cost of Capital
Discount/Finance rate = Reinvestment rate
The Cash Flow:
|
Year |
Cash Flow Project – Relocation to Chicago, IL |
|
0 |
+$500,000 |
|
1 |
-$4,000,000 |
|
2 |
-$4,000,000 |
|
3 |
-$4,000,000 |
|
4 |
-$4,000,000 |
|
5 |
+$20,000,000 |
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