Question

A company is planning to start an investment, which will cost an initial investment of $ 15 million. The management has already forecasted all future cash flows from this project: $4 million each year, for the next 6 years. Then the investment (machinery etc) will be sold for a price of $3 million.

Calculate the MIRR, knowing that recovered funds will be reinvested at a rate of  12% annual nominal, compounded annually.  For the external financing rate, the company uses the MARR. The MARR is 11% annual nominal, compounded annually. Should the company accept this investment or not ?

Answer 1

FV of CFs:

Year	Bal Years	CF	FVF @12%	FV of CFs
1	5	$      4.00	1.7623	$      7.05
2	4	$      4.00	1.5735	$      6.29
3	3	$      4.00	1.4049	$      5.62
4	2	$      4.00	1.2544	$      5.02
5	1	$      4.00	1.1200	$      4.48
6	0	$      7.00	1.0000	$      7.00
FV of CFs	$   35.46

Thus $ 15 M has become 35.46 M over a period of 6 years by increasing at r%

FV = PV(1+r)^n

35.46 = 15 ( 1 + r)^6

(1+r)^6 = 35.46 / 15

= 2.36

1+r = 2.36 ^ ( 1 / 6)

= 1.1542

r = 0.1542 i.e 15.42%

As r ( 15.42%) > MARR ( 11%) Project can be accepted.