Question

Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $20,000 the first year, $22,000 the second year, $25,000 the third year, -$8,000 the fourth year, $32,000 the fifth year, $38,000 the sixth year, $41,000 the seventh year, and -$6,000 the eighth year. The project would cost the firm $90,200. If the firm's cost of capital is 17%, what is the modified internal rate of return?

Question 29 options:

	16.33%
	13.78%
	15.40%
	13.25%
	17.19%

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 8 modified cash flow=(60024.84)+(56433.61)+(54811.2)+(51251.62)+(52018.2)+(47970)
=322509.47
Thus year 0 modified cash flow=-90200-4269.2-1708.69
=-96177.89
Discount rate	0.17
Year	0	1	2	3	4	5	6	7	8
Cash flow stream	-90200	20000	22000	25000	-8000	32000	38000	41000	-6000
Discount factor	1	1.17	1.3689	1.601613	1.8738872	2.192448	2.565164	3.001242	3.511453
Compound factor	1	3.001242	2.565164	2.192448	1.8738872	1.601613	1.3689	1.17	1
Discounted cash flows	-90200	0	0	0	-4269.2	0	0	0	-1708.69
Compounded cash flows	0	60024.84	56433.61	54811.2	0	51251.62	52018.2	47970	0
Modified cash flow	-96177.89	0	0	0	0	0	0	0	322509.5
Discounting factor (using MIRR)	1	1.163278	1.353215	1.574165	1.8311909	2.130184	2.477995	2.882596	3.35326
Discounted cash flows	-96177.89	0	0	0	0	0	0	0	96177.89
NPV = Sum of discounted cash flows
NPV=	1.22607E-05
MIRR is the rate at which NPV = 0
MIRR=	16.33%
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)