Question

1. Project A cost $1,050 and Project B cost $1,050, there expected net cash inflows are shown on the timeline below and there WACC is 10.00%. What is Project A's Modified Internal Rate of Return (MIRR)?

WACC 10.00%

                      0              1              2               3              4

                        l              l               l                l                l   

ProjA      -$1,050         $675       $650

ProjB   -$1,050         $360   $360         $360        $360

Answer 1

Project B
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 4 modified cash flow=(479.16)+(435.6)+(396)+(360)
=1670.76
Thus year 0 modified cash flow=-1050
=-1050
Discount rate	0.1
Year	0	1	2	3	4
Cash flow stream	-1050	360	360	360	360
Discount factor	1	1.1	1.21	1.331	1.4641
Compound factor	1	1.331	1.21	1.1	1
Discounted cash flows	-1050	0	0	0	0
Compounded cash flows	0	479.16	435.6	396	360
Modified cash flow	-1050	0	0	0	1670.76
Discounting factor (using MIRR)	1	1.123133	1.261428	1.416751	1.5912
Discounted cash flows	-1050	0	0	0	1050
NPV = Sum of discounted cash flows
NPV=	1.9748E-05
MIRR is the rate at which NPV = 0
MIRR=	12.31%
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)