Asked by ronak hindocha on May 09, 2024
Verified
A project has a series of non-normal cash flows that result in a terminal value (TV) of $25,000 in 10 years.If the project's initial costs are $7,500,what is your recommendation regarding this project to management (accept/reject) ?
A) accept as the MIRR is 12.79%
B) reject as the MIRR is greater than zero
C) accept as the terminal value is greater than the present value of the costs
D) accept as the MIRR is 12.50%
Terminal Value
An estimate of a business's value beyond the explicit forecast period and into perpetuity, often used in financial modeling to estimate the company's long-term sustainability.
Non-Normal Cash Flows
Cash inflows and outflows that do not follow a regular, predictable pattern over time.
MIRR
Modified Internal Rate of Return; a financial measure used to evaluate the attractiveness of investments, adjusting for the costs of investment and for different rates of reinvestment of cash flows.
- Analyze and clarify the significance of the Modified Internal Rate of Return (MIRR) within project appraisal processes.
- Assess the impact of non-normal cash flows on project evaluation and selection.
Verified Answer
DD
Davotrick DotreyMay 10, 2024
Final Answer :
A
Explanation :
The Modified Internal Rate of Return (MIRR) being 12.79% indicates that the project's return exceeds its cost of capital, making it a worthwhile investment.
Learning Objectives
- Analyze and clarify the significance of the Modified Internal Rate of Return (MIRR) within project appraisal processes.
- Assess the impact of non-normal cash flows on project evaluation and selection.