Page 39 - AFM Integrated Workbook STUDENT S18-J19

Investment appraisal

Question 2

Konta Co is evaluating a new investment project.

The forecast free cash flows are:

$000 T 0 T 1 T 2 T 3 T 4 T 5

FCF (3,500) 1,200 1,150 1,450 1,300 1,000

The company’s cost of capital is 10%.

Required:

Calculate the project’s MIRR.

Solution

$000 T 1 T 2 T 3 T 4 T 5

Return phase 1,200 1,150 1,450 1,300 1,000

DF @ 10% 0.909 0.826 0.751 0.683 0.621

PV 1,091 950 1,089 888 621

So total PV R = $4,639,000

1
PV R n
Therefore MIRR = 1+ r –1
e
PV I
1
4,639,000 5
= 1.10 –1
3,500,000

= 0.164 (16.4%)

This is higher than the cost of capital, so the project is financially acceptable.

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