In: Finance
What is the MIRR of project with the following cash flows? The discounting rate is 14%.
Year Cash Flow
0 -1,200,000
1 400,000
2 500,000
3 500,000
4 500,000
5 500,000
6 500,000
Project | |||||||
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 6 modified cash flow=(770165.83)+(844480.08)+(740772)+(649800)+(570000)+(500000) | |||||||
=4075217.91 | |||||||
Thus year 0 modified cash flow=-1200000 | |||||||
=-1200000 | |||||||
Discount rate | 0.14 | ||||||
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
Cash flow stream | -1200000 | 400000 | 500000 | 500000 | 500000 | 500000 | 500000 |
Discount factor | 1 | 1.14 | 1.2996 | 1.481544 | 1.6889602 | 1.925415 | 2.194973 |
Compound factor | 1 | 1.925415 | 1.68896 | 1.481544 | 1.2996 | 1.14 | 1 |
Discounted cash flows | -1200000 | 0 | 0 | 0 | 0 | 0 | 0 |
Compounded cash flows | -8.33333E-07 | 770165.8 | 844480.1 | 740772 | 649800 | 570000 | 500000 |
Modified cash flow | -1200000 | 0 | 0 | 0 | 0 | 0 | 4075218 |
Discounting factor (using MIRR) | 1 | 1.226013 | 1.503107 | 1.842828 | 2.2593303 | 2.769967 | 3.396015 |
Discounted cash flows | -1200000 | 0 | 0 | 0 | 0 | 0 | 1200000 |
NPV = Sum of discounted cash flows | |||||||
NPV= | 5.3551E-09 | ||||||
MIRR is the rate at which NPV = 0 | |||||||
MIRR= | 22.60% | ||||||
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) |