Question

Management of Sunland Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $213,550 and will generate cash flows of $76,750 over each of the next six years. If the cost of capital is 14 percent, what is the MIRR on this project? (Round intermediate calculations to 3 decimals and final answers to 1 decimal places, e.g. 15.5%. Do not round factor values.)

MIRR

%

Answer 1

Project
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 6 modified cash flow=(147775.57)+(129627.69)+(113708.5)+(99744.3)+(87495)+(76750)
=655101.06
Thus year 0 modified cash flow=-213550
=-213550
Discount rate	0.14
Year	0	1	2	3	4	5	6
Cash flow stream	-213550	76750	76750	76750	76750	76750	76750
Discount factor	1	1.14	1.2996	1.481544	1.6889602	1.925415	2.194973
Compound factor	1	1.925415	1.68896	1.481544	1.2996	1.14	1
Discounted cash flows	-213550	0	0	0	0	0	0
Compounded cash flows	-4.68274E-06	147775.6	129627.7	113708.5	99744.3	87495	76750
Modified cash flow	-213550	0	0	0	0	0	655101.1
Discounting factor (using MIRR)	1	1.20541	1.453013	1.751477	2.1112475	2.544919	3.067671
Discounted cash flows	-213550	0	0	0	0	0	213550
NPV = Sum of discounted cash flows
NPV=	2.36163E-05
MIRR is the rate at which NPV = 0
MIRR=	20.5%
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)