Question

Management of Sycamore Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $263,400 and will generate cash flows of $85,000 over each of the next six years. If the cost of capital is 12 percent, what is the MIRR on this project? (Round intermediate calculations to 3 decimals and final answers to 1 decimal places, e.g. 15.5%. Do not round factor values.)

Answer 1

Modified Internal Rate of Return can be calculated as nth root of (Future cash flow /Out flow of the project) - 1

Out Flow of the project = $263,400

Future value of cash flows = $689,791.1 (Note 1)

n = number of periods = 6 years

MIRR = 6th root of ($688,791.1 / $263,400) - 1

= 6th root of 2.615 - 1

= 1.173758 - 1

= 17.38%

MIRR on this project = 17.4%

Note 1:
Year	Cash Flows	Interest rate @12% (1+12%)^n	Future Value
1	85000	1.762341683	149799
2	85000	1.57351936	133749.1
3	85000	1.404928	119418.9
4	85000	1.2544	106624
5	85000	1.12	95200
6	85000	1	85000
Future value of cash flows			689791.1

Y1: n= 5 for year 1 as cash flows earn interest for 5 years

Y2: n= 4 for year 2 as cash flows earn interest for 4 years

Y3: n= 3 for year 3 as cash flows earn interest for 3 years

Y4: n= 2 for year 4 as cash flows earn interest for 2 years

Y5: n= 1 for year 5 as cash flows earn interest for 1 years

Y6: n= 0 for year 6 as cash flows earn interest for 0 years