Question

A company’s weighted average cost of capital is 13.2% per year. A project requires an investment of $120,000 today and it is expected to generate after-tax cash flows of $30,000 at the end of year 1, $40,000 at the end of year 2, $50,000 at the end of year 3, and $60,000 at the end of year 4. What is the project’s annual modified internal rate of return?

Answer 1

Modified IRR:

It is similar to IRR. In IRR, we are assumed that intermediary cashflows are reinvested at IRR only. In MIRR, we assume that Intermediary CFs are reinvested at
Reinvestment Rate rather than at IRR.

Year	Bal Years	CF	FVF @0.132	FV of CFs
1	3	$ 30,000.00	1.4506	$    43,517.16
2	2	$ 40,000.00	1.2814	$    51,256.96
3	1	$ 50,000.00	1.1320	$    56,600.00
4	0	$ 60,000.00	1.0000	$    60,000.00
Future Value of CFs	$ 2,11,374.12

Thus $120000 has become $211374.12 over a period of 4 Years

Future Value = Cash Flow * ( 1 + r )^n

$ 211374.12 = $ 120000 ( 1 + r) ^ 4

( 1 + r) ^ 4 = $211374.12 / $ 120000

( 1 + r) ^ 4 = 1.7615

( 1 + r) = 1.7615 ^ ( 1 / 4 )

( 1 + r) = 1.152

r = 1.152 -1

r = 0.152

i.e MIRR is 15.2 %

Pls do rate, if the answer is correct and comment, if any further assistance is required.