. A company is planning to start an investment, which will cost an initial investment of $ 15 million. The
management has already forecasted all future cash flows from this project: $4 million each year, for the next 6
years. Then the investment (machinery etc) will be sold for a price of $3 million.
Calculate the MIRR, knowing that recovered funds will be reinvested at a rate of 12% annual nominal,
compounded annually. For the external financing rate, the company uses the MARR. The MARR is 11%
annual nominal, compounded annually. Should the company accept this investment or not ?
2. A German company is planning to replace the old machine for a new one. The new machine will cost Euro
4 million, the old one can not be sold. The new machine will be used for 20 years, then it can be sold for 25%
of the purchase price. Each year the company will save Euro 450,000 on the production costs, but the
maintenance costs will be higher too: Euro 40,000 per year. In year 10, a special maintenance has to be
performed which will cost Euro 600,000.
The company wants you to calculate the MIRR, with given that recovered funds will be reinvested at the Euro
short term interest rate, which is 0.5% monthly. For the external financing rate, the company uses the MARR,
which is 7.5% annual nominal, compounded monthly.
a) Calculate the MIRR
b) Should the company accept this investment or not ?
Profitability Index (PI)
3. A small family business wants to expand and is planning to start an investment, which will cost an
initial investment of $50,000. The father is sure that the investment will generate annual cash flows of
$11,000 for the next 10 years. In exactly 5 years from now, the machine needs some serious maintenance,
which will cost $20,000. At the end of the 10 years the investment can be sold for $5,000. The MARR
(Minimum Attractive Rate of Return) is 12% annual nominal, compounded semi-annually.
a) What is the Net Present Value of the investment ?
b) What is the Profitability Index of the investment ?
c) Should the company accept this investment or not ?