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Alaska Salmon Inc., a large salmon canning firm operating out of Valdez, Alaska, has a new automated production line project it is considering. The project has a cost of $150,000 and is expected to provide after-tax annual cash flows of $73,306 for eight years. The firm's management is uncomfortable with the internal rate of return (IRR) reinvestment assumption and prefers the modified IRR approach. You have calculated a cost of capital for the firm of 12 percent. What is the project's modified internal rate of return (MIRR)? Given that the cost of capital is 12 percent, should the project be accepted? Why?

Respuesta :

MIRR stands for modified internal rate of return which is used to compare the potential projects with the return of projects. MIRR is a modified version of the internal rate of return (IRR) which is used to calculate the reinvestment rate or cash flows of even and uneven accounts.

In the question, given information:

Cash flow 0= -150,000

Cash flow 1= 73,306

Cash flow 2= 73,306

r = 12%

Now, MIRR= (future value of positive cash flows/ percent value of negative cash flows) (1/n)-1

I.e., n(FVCF / PVCF) -1

Therefore,

FVCF= future value of positive cash flows discounted at r.

= (73,306 / 1+12%) + (73,306 /1.128 )

= 65,452 + 29,607

= $95,059

PVCF= present value of negative cash flows= -150,000

n= number of years= 8

MIRR = (95,059 /-150,000) - 1

= 3.7%

Know more about MIRR:https://brainly.com/question/14806092

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