Question

Mittuch Corp. is evaluating a project with the following cash flows. The company uses a discount rate of 12 percent and a reinvestment rate of 9 percent on all of its projects.

Year	Cash Flow
0		–$	15,600
1			6,700
2			7,900
3			7,500
4			6,300
5			–3,700

Calculate the MIRR of the project using all three methods with these interest rates. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

	MIRR
Discounting approach	%
Reinvestment approach	%
Combination approach	%

Answer 1

1) Discounting approach:

We find the value of all cash flows at time 0.

Time 0 cash flow = -15,600 - (3700/1.12⁵ )= $17,700

So MIRR using discounting approach is:

0= -17,700+ 6700/(1+MIRR) + 7900/(1+ MIRR)² + 7500/(1+ MIRR)³ + 6300/(1 + MIRR)⁴ = 22.23%

(Use IRR in excel)

2) Reinvestment approach:

In the reinvestment approach, we find the future value of all cash except the initial cash flow at the end of the project using the reinvestment rate. So, the reinvesting the cash flows to time 5, we find:

Time 5 cash flow = 6700 x 1.09⁴ + 7900 x 1.09³ + 7500 x 1.09² + 6300 x 1.09 - 3700 = 9457.6 + 10230.73
+ 8910.75 + 6867 - 3700 = $31,766.08

MIRR:

0 = -15600 + 31,766.08/(1 + MIRR)⁵

(1 + MIRR)⁵ = 31,766.08/15,600

Or, MIRR = = 15.28%

(Use power function in excel - 2.0363,1/5)

3) Combination approach:

In the combination approach, we find the value of all cash outflows at time 0 using the discount rate,and the value of all cash inflows at the end of the project using the reinvestment rate. So, the value ofthe cash flows is:

We find the value of all cash flows at time 0.

Time 0 cash flow = -15,600 - (3700/1.12⁵ )= $17,700

Time 5 cash flow = 6700 x 1.09⁴ + 7900 x 1.09³ + 7500 x 1.09² + 6300 x 1.09 = $35,466.08

MIRR:

0 = -17,700 + 35,466.08/(1+MIRR)⁵

Or, MIRR = = 14.92%