Question

6) Refer to the capital budgeting narrative. What is the MIRR of the project?

Capital Budgeting Narrative:

(Use the following information for questions referring to the narrative): Aferine Electric is considering a new project. The initial investment required is $106,639.60 and the cost of capital is 8%. Expected cash flows over the next four years are given below:

Years	Cash Flow ($)
1	7,000
2	37,000
3	41,000
4	90,000

A) 17.1%

B) 13.8%

C) 14.1%

D) 15.0%

E) 8%

Answer 1

Modified Internal rate of return assumes that positives cash flows are invested at the firm's cost of capital and
initial outlays are financed at the firm's financing cost.
In the give problem only one rate is given , hence we assume that cost of capital = cost of financing
The formula to calculate MIRR is as under,
MIRR = [FVCF / PVCF]^(1/n) - 1
FVCF = Future value of positive cash flows = $186254.78
PVCF = Present value of negative cash flows = $106639.60
n = no.of years = 4
Future value of positive cash flows at cost of capital of 10% is as under
Year	Cash flow	Future value of factor @ 8%	Future Value
1	$7,000.00	1.259712	$8,817.98
2	$37,000.00	1.1664	$43,156.80
3	$41,000.00	1.08	$44,280.00
4	$90,000.00	1	$90,000.00
Future value of positive cash flow			$186,254.78
MIRR = [189187 / 106639.60]^(1/4) - 1
MIRR = 1.149601 - 1
MIRR = 0.150
MIRR = 15.0%
The answer is Option D.