2.Based on the cash flows shown in the chart below, compute the IRR and MIRR for Project Erie. Suppose that the appropriate cost of capital is 12 percent. Advise the organization about whether it should accept or reject the project. Project Erie

Time012345

Cash Flow$12,000$2,360$4,390$1,520$980$1 ,250

IRR = -5.19%

MIRR =  3.33%

The company should reject the project

Step-by-step explanation:

Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested

IRR can be calculated with a financial calculator

Cash flow in year 0 = -$12,000

Cash flow in year 1 = $2,360

Cash flow in year 2 =  $4,390

Cash flow in year 3 = $1,520

Cash flow in year 4 = $980

Cash flow in year 5 = $1,250

IRR = 5.19%

The modified internal rate of return is a capital budgeting method used to determine the profitability of an investment. The MIRR assumes that cash inflows are reinvested at the firm's cost of capital and outflows are financed at the firm's financing cost.

MIRR = (Future value of a firm's cash inflow / present value of the firm's cash outflow)^ (1/n)  - 1

n = number of years

present value of the firm's cash outflow = $12,000

Future value of a firm's cash inflow

Future value of year 1's cash flow = $2,360 x (1.12^4) = $3,713.51

Future value of year 2's cash flow =$4,390 x (1.12^3) = $6167.63

Future value of year 3's cash flow =$1,520  x (1.12^2) = $1906.69

Future value of year 4's cash flow = $980 X 1.12 = 1097.60

Future value of year 5's cash flow = 1250

Add the future values together = $14,135.43

($14,135.43 / $12,000)^0.2 - 1 = 3.33%

The project should be rejected because the IRR is negative.  

To find the IRR using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.  

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step-by-step explanation: