A project has the following cash flows : Year Cash Flows 0 −$11,700 1 5,110 2...

A project has the following cash flows : Year Cash Flows 0 −$11,700 1 5,110 2 7,360 3 4,800 4 −1,640 Assuming the appropriate interest rate is 7 percent, what is the MIRR for this project using the discounting approach?

Expert Solution

Combination approach
All negative cash flows are discounted back to the present and all positive cash flows are compounded out to the end of the project’s life
Thus year 4 modified cash flow=(6259.97)+(8426.46)+(5136)
=19822.43
Thus year 0 modified cash flow=-11700-1251.15
=-12951.15


Discount rate	7.000%
Year	0	1	2	3	4
Cash flow stream	-11700.000	5110.000	7360.000	4800.000	-1640.000
Discount factor	1.000	1.070	1.145	1.225	1.311
Compound factor	1.000	1.225	1.145	1.070	1.000
Discounted cash flows	-11700.000	0	0	0	-1251.15
Compounded cash flows	0.000	6259.97	8426.46	5136	0
Modified cash flow	-12951.150	0	0	0	19822.430
Discounting factor (using MIRR)	1.000	1.112	1.237	1.376	1.531
Discounted cash flows	-12951.150	0.000	0.000	0.000	12951.150
NPV = Sum of discounted cash flows
NPV=	0.00
MIRR is the rate at which NPV = 0
MIRR=	11.23%
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Compounding factor =	(1 + reinvestment rate)^(time of last CF-Corresponding period in years)
Compounded Cashflow=	Cash flow stream*compounding factor

jeff jeffy answered 1 year ago

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