Question

A firm has estimated its cost of capital as 5% and is considering a project with an initial investment of -$265,000. The subsequent cash flows are $65,000; $77,000; $83,000; $91,000; and $96,000. In the final year (year #6), the firm must pay $50,000 to clean up the site. Calculate the project’s MIRR using the three methods discussed in class. Please provide timelines, a description of all of your math, and calculator inputs.

Answer 1

		Present Value (PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=Discount Rate=Cost of capital=0.05
		N=Year of Cash Flow
		Future value of Cash Flow at end of 6 years:
		FV=(Cash Flow)*(1.05^(6-N))
	N	Year	0	1	2	3	4	5	6
	A	Cash Flow	($265,000)	$65,000	$77,000	$83,000	$91,000	$96,000	($50,000)	SUM
	B=A/(1.05^N)	Present value of Negative cash flows	($265,000)						-$37,311	-$302,311
	C=A*(1.05^(6-N)	Future value of Positive Cash Flow at end of 6 years:		$82,958	$93,594	$96,083	$100,328	$100,800		$473,763
		MIRR=Modified Internal Rate of Return
		MIRR assumes that positive cash flows are reinvested at cost of capital of the company
		Assume MIRR=R
		302311*((1+R)^6)=473763
		(1+R)^6=473763/302311=	1.57
		1+R=(1.57^(1/6))=	1.0777496
		R=	0.0777496
		MIRR=R=	0.0777496
		MIRR=	7.77%