Question

Chamberlain Corp. is evaluating a project with the following cash flows: Year Cash Flow 0 –$ 23,000 1 8,400 2 9,200 3 8,900 4 7,500 5 – 5,000 Required: The company uses an interest rate of 6 percent on all of its projects. Calculate the MIRR of the project using all three methods. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

MIRR Discounting approach %

Reinvestment approach %

Combination approach %

Answer 1

Discounting Method:

Present Value of Cash Outflows = -$23,000 - $5,000/1.06^5
Present Value of Cash Outflows = -$26,736.29

Let MIRR be i%

0 = -$26,736.29 + $8,400/(1+i)^1 + $9,200/(1+i)^2 + $8,900/(1+i)^3 + $7,500/(1+i)^4

Using financial calculator, i = 10.55%

So, MIRR using discounting method is 10.55%

Reinvestment Method:

Future Value of Cash Flows = $8,400*1.06^4 + $9,200*1.06^3 + $8,900*1.06^2 + $7,500*1.06 - $5,000
Future Value of Cash Flows = $34,512.19

Let MIRR be i%

0 = -$23,000 + $34,512.19/(1+i)^5
(1+i)^5 = 1.5005
1+i = 1.0845
i = 0.0845 = 8.45%

So, MIRR using reinvestment method is 8.45%

Combination Method:

Present Value of Cash Outflows = -$23,000 - $5,000/1.06^5
Present Value of Cash Outflows = -$26,736.29

Future Value of Cash Inflows = $8,400*1.06^4 + $9,200*1.06^3 + $8,900*1.06^2 + $7,500*1.06
Future Value of Cash Inflows = $39,512.19

Let MIRR be i%

0 = -$26,736.29 + $39,512.19/(1+i)^5
(1+i)^5 = 1.47785
1+i = 1.0813
i = 0.0813 = 8.13%

So, MIRR using combination method is 8.13%