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, $+15,000 in years 1 through 6, and $?8000 in year 7. Assume a borrowing rate of 12% and an investment rate of 25% per year. Also, write the MIRR function to obtain i?.
What will be an ideal response?
PW 0 = -50,000 – 8000(P/F,12%,7)
= -50,000 – 8000(0.4523)
= $-53,618
FW 7 = 15,000(F/A,25%,6)(F/P,25%,1)
= 15,000(11.2588)(1.2500)
= $211,103
Find EROR i? at which PW 0 is equivalent to FW 7
-53,618(F/P,i?,7) = 211,103
i’ = (211,103/53,618) 1/7 – 1
= (3.93717) 1/7 - 1
= 0.216 (21.6%)
Function: = MIRR(B1:B8,12%,25%) displays 21.6% with B1:B8 containing NCF
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