Question

RAK Corp. is evaluating a project with the following cash flows:

  

Year Cash Flow
0 –$ 29,800
1 12,000
2 14,700
3 16,600
4 13,700
5 – 10,200

The company uses a discount rate of 13 percent and a reinvestment rate of 6 percent on all of its projects.

  

Calculate the MIRR of the project using the discounting approach. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

  MIRR %

  

Calculate the MIRR of the project using the reinvestment approach. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

  MIRR %  

Calculate the MIRR of the project using the combination approach. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

Answer 1

		Future Value of cash Flow=(Cash Flow)*((1+r)^(5-N))
		Total number of years of project=5
		r=rate considered
		N=Year of cash flow
		Year wise cash flow and FV of Cash flow given Below
		N	A	B=A*(1.13^(5-N))	C=A*(1.06^(5-N))
		Year	Cash flow	FV of cash flow	FV of cash flow using
				using discount rate(0.13)	reinvestment rate(0.06)
		1	$12,000	19565.68332	15149.72352
		2	$14,700	21210.5859	17507.9352
		3	$16,600	21196.54	18651.76
		4	$13,700	15481	14522
		5	($10,200)	-10200	-10200
			TOTAL	$                           67,253.81	$                            55,631.42
	Initial investment	$29,800
	MIRR of the project using discounting approach=R1
	(1+R1)^5=67253.81/29800=	2.256839236
	1+R1=2.256839236^(1/5)=	1.176793131
	R1=1.176793131-1=	0.176793131
	MIRR of the project using discounting approach=R1	17.68%
	MIRR of the project using reinvestment approach=R2
	(1+R2)^5=55631.42/29800=	1.866826132
	1+R2=1.132976167^(1/5)=	1.132976167
	R2=1.132976167-1=	0.132976167
	MIRR of the project using discounting approach=R2	13.30%
	CALCULATION OF MIRR USING COMBINATION APPROACH
	In this approach we use discount rate to find Present Value of cash outflow
	We use reinvestment rate to find Future Value of cash inflows
	Present Value of Cash outflows=29800+(10200/(1.13^5)=	35336.15135
	Future Valu of Cash inflow:
		N	A	C=A*(1.06^(5-N))
		Year	Cash flow	FV of cash flow using
				reinvestment rate(0.06)
		1	$12,000	15149.72352
		2	$14,700	17507.9352
		3	$16,600	18651.76
		4	$13,700	14522
			TOTAL	65831.41872
	MIRR of the project using combination approach=R3
	(1+R3)^5=65831.42/35336.15=	1.863004776
	1+R3=1.863004776^(1/5)=	1.132511951
	R3=1.132511951-1=	0.132511951
	MIRR of the project using combinationapproach=R3	13.25%