Question

1. Project A cost $1,000 and Project B cost $1,000, there expected net cash inflows are shown on the timeline below and there WACC is 10.00%. What is Project B's Modified Internal Rate of Return (MIRR)?

WACC 10.00%

                      0              1              2               3              4

                        l              l               l                l                l   

ProjA      -$1,000         $675       $650

ProjB   -$1,000       $1,000   $700        $50           $50

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=(1331)+(847)+(55)+(50)
=2283
Thus year 0 modified cash flow=-1000
=-1000
Discount rate	0.1
Year	0	1	2	3	4
Cash flow stream	-1000	1000	700	50	50
Discount factor	1	1.1	1.21	1.331	1.4641
Compound factor	1	1.331	1.21	1.1	1
Discounted cash flows	-1000	0	0	0	0
Compounded cash flows	0	1331	847	55	50
Modified cash flow	-1000	0	0	0	2283
Discounting factor (using MIRR)	1	1.229211	1.51096	1.857289	2.2829997
Discounted cash flows	-1000	0	0	0	1000.0001
NPV = Sum of discounted cash flows
NPV=	0.000128903
MIRR is the rate at which NPV = 0
MIRR=	22.92%
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)