Sleepon Dec 2000

I am puzzled - the only exam question ever called Sleepon was asked in December 2005 and did not ask anywhere for MIRR :-(

I have the actual exam in front of me, and Sleepon does not have a part (a)(i) in either the question or the answer :-) It asked for a report analysing whether or not Sleepon should undertake the investment in the theme park. (MIRR was not in the syllabus in 2005!) I can only guess that maybe you have this question in a Revision Kit and they have added an extra bit which was not in the original exam question.

OK This approach to getting the MIRR needs you to calculate the terminal value. You then divide the terminal value by the initial investment, text the nth root, and then subtract 1. For the terminal value, here you want the value at time 5. The cash flow at time 5 is already at time 5 (!) and so the multiplier is 1. To get the time 5 value of the flow at time 4, you add on 1 years interest at 11%, so multiply the cash flow by 1.11 To get the time 5 value of the flow at time 3, you add on 2 years interest at 11%, so multiply the cash flow by 1.11^2 = 1.232 To get the time 5 value of the flow at time 2, you add on 3 years interest at 11%, so multiply the cash flow by 1.11^3 = 1.368 Hope that helps :-)

You are welcome :-)

Hi sir, may I know when are we supposed to use this MIRR formula? Usually the formula we use is different from this.

You can use either approach - it doesn't matter. I would use the formula. It is just that the BPP answer that was being asked about happens to use the other way for some reason - they didn't need to.

Dear John Was also wondering - In Sleepon the project is all debt and the company's gearing changes as a result so why is APV not used instead of NPV?

The question specifically says in the requirements to use the NPV method - if they had wanted you to use APV instead then it would have said so. It would, however, be a good point to mention in the report - that maybe APV would have been a better approach.