Question

In: Finance

What is the MIRR of project with the following cash flows? The discounting rate is 14%....

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

Solutions

Expert Solution

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)

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