Management of Blossom Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $225,550 and will generate cash flows of $97,750 over each of the next six years. If the cost of capital is 12 percent, what is the MIRR on this project?

26.78%

Explanation:

The first task is to compute the internal rate of return using the formula below:

IRR=lower rate of interest+NPV at lower rate of interest/(NPV at lower rate of interest-NPV at higher rate of interest)*(higher rate of interest-lower rate of interest)

NPV at 12% lower rate:

NPV=-$225,550+$97,750/(1+12%)^1++$97,750/(1+12%)^2+$97,750/(1+12%)^3+$97,750/(1+12%)^4+$97,750/(1+12%)^5+$97,750/(1+12%)^6= 176,340.07  

NPV at 42% (higher rate)

NPV=-$225,550+$97,750/(1+42%)^1++$97,750/(1+42%)^2+$97,750/(1+42%)^3+$97,750/(1+42%)^4+$97,750/(1+42%)^5+$97,750/(1+42%)^6=-21,200.08

IRR=12%+176,340.0/(176,340.0--21,200.08)*(42%-12%)=38.78%

MIRR=(PV of inflows/PV of outflow)^(1/n)*(1+cost of capital)-1

PV of inflows=$97,750/(1+12%)^1++$97,750/(1+12%)^2+$97,750/(1+12%)^3+$97,750/(1+12%)^4+$97,750/(1+12%)^5+$97,750/(1+12%)^6=401890.0659

PV of outflow=225,550

cost of capital=12%

MIRR=(401890.0659 /225,550 )^(1/6)*(1+12%)-1=26.78%

answer; the correct answer is (0.08);

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