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The Martian Corporation, a space vehicle development company, is starting a new division that will develop the next-generation launch missile engine configuration. Use a hand application of the MIRR method to determine the EROR for the estimated net cash flows (in $1000 units) of $-50,000 in year 0, $11,000 in years 1 through 8, and $-3,000 in year 9. Assume a borrowing rate of 11% and an investment rate of 28% per year.

Answer :

ajeigbeibraheem

Answer:

21.77%

Explanation:

       Year          Cashflows

1          0              $ - 50,000

2         1                $ 11,000

3         2                $ 11,000

4         3                $ 11,000

5         4               $ 11,000

6         5               $ 11,000

7         6               $ 11,000

8         7               $ 11,000

9         8               $ 11,000

10        9                $ 3,000

Borrowing Rate = 11%  = 0.11

Investment rate = 28% = 0.28

To calculate the PW(expense) and FW(revenue); we go by the formula:

[tex]PW= \frac{F}{(1+i)^0}-3000[/tex]

[tex]PW = \frac{-50,000}{(1+0.11)^0}-3000[/tex]

[tex]PW = \frac{-50,000}{1}- 3000[/tex]

[tex]PW = - 53,000[/tex]

[tex]FW = P(1+i)^n[/tex]

[tex]FW = 11,000(1+0.28)^{9-1}+11,000(1+0.28)^{9-2}+11,000(1+0.28)^{9-3}...11,000(1+0.28)^{9-8}[/tex]

[tex]FW =[/tex] $ 312061.0443

To calculate MIRR; we use the formula:

1+ MIRR = [tex](\frac{FW}{PW} )^{1/n}[/tex]

1+ MIRR = [tex](\frac{31,2061.0443}{53,000} )^{1/9}[/tex]

1+ MIRR = 1.2177

MIRR = 1.2177- 1

MIRR = 0.2177

MIRR = 21.77%

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