Question

Assume that the net cash flow of a potential $7.25 million investment is $1.1 million in year 1, then $1.25 million in year 2, $1.4 million in year 3, $2.2 million in year 4 and year 5, and then sold at the end of year 5 for $850,000. Further assume that in each year cash flows (excluding initial investment) could be as much as $400,000 less than forecast, or $400,000 more than forecast. Suppose you assess the “low net cash flow” probability at 25 percent likely, the base (original) scenario at 50 percent likely, and the “high net cash flow” probability at 25 percent. The corporate cost of capital is 9 percent.

1. What is the worst case MIRR? ____%

- What is the best case MIRR? ____%

Answer 1

1. Worst case MIRR:

Worst case MIRR = (FV of Cash inflows / PV of Cash Outflows)^(1/Years) - 1

Worst case MIRR = (7888981.78 / 7250000)^(1/5) - 1

Worst case MIRR = 1.0170 - 1

Worst case MIRR = 1.70%

2. Best Case Scenario

Best case MIRR = (FV of Cash inflows / PV of Cash Outflows)^(1/Years) - 1

Best case MIRR = (12676750.27 / 7250000)^(1/5) - 1

Best case MIRR = 1.1182 - 1

Best case MIRR = 11.82%