Question

annual cash flow,

-500,000
125,000
150,000
175,000
200,000
250,000

What is the Modified IRR (MIRR), with a reinvestment rate equal to the WACC of 8%?

Answer 1

The modified internal rate of return (MIRR) is a financial measure of an investment's attractiveness, used to rank alternative investment options.

The basic assumption is each year’s returns that are coming out of that investment will be put back into the same business each year.

MIRR = nth root of(TVCF/PVCF)- 1

Where n= no of periods

TVCF is the terminal value of positive cash inflows discounted at the reinvestment rate

PVCF is the present value of negative cash out    flows discounted at the financing rate

Here, n= 6; finance rate = WACC=8%; reinvestment rate = 8%

PVCF = -500,000

MIRR     = 6th root of(1,029,138/500,000)- 1 =  

                =

                = 1.1553 – 1

MIRR     = 0.1553 = 15.53% or approximately 16%