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ACCA AFM · Guided practice (Show me how)

Chapter 9: Discounted Cash Flow Techniques

IRR by interpolation and the modified IRR

Rome plc's project has these net cash flows ($000): year 0 (2,000); year 1 414; year 2 410; year 3 417; year 4 430; year 5 1,508. At the 10% cost of capital its NPV is $258 (thousands).

Internal rate of return. For the project, calculate the internal rate of return.

Modified internal rate of return. For the project, calculate the MIRR, using the formula given in the examination: MIRR = (PV_R / PV_I)1/n x (1 + re) - 1, where PV_R is the present value of the return phase, PV_I the present value of the investment phase, n the life of the project in years and re the cost of capital.

Discount factors, years 1 to 5: at 10% 0.909, 0.826, 0.751, 0.683, 0.621; at 15% 0.870, 0.756, 0.658, 0.572, 0.497. Round each present value to the nearest $000.

  1. Example 2: a second NPV

    Calculate the net present value of Rome plc's project at the higher trial discount rate.

  2. Example 2: the IRR by interpolation

    Calculate the internal rate of return of Rome plc's project.

  3. Example 3: the MIRR

    Calculate the present value of Rome plc's return phase and its modified internal rate of return, and explain the reinvestment assumption.

Opening this exercise…