Question

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?

Answer 1

	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