Question

The Martian Corporation, a space vehicle development company, is starting a new division that will develop the next-generation launch missile engine configuration. Use a hand application of the MIRR method to determine the EROR for the estimated net cash flows (in $1000 units) of $-40,000 in year 0, $11,000 in years 1 through 7, and $-2,000 in year 8. Assume a borrowing rate of 8% and an investment rate of 20% per year.

The external rate of return is  %.?

Answer 1

Year	Cash flows	Present value of negative cash flows	Future value of positive cash flows
0	-40000	-40000
1	11000		39415
2	11000		32846
3	11000		27372
4	11000		22810
5	11000		19008
6	11000		15840
7	11000		13200
8	-2000	-1081
Total		-41081	170491

Present value of negative cash flows = negative cash flows / ((1+R) ^ n)

Future value of positive cash flows = positive cash flows * ((1+R) ^ n)

Total Present value of negative cash flows = (-40000/(1.08^0)) +(-2000/(1.08^8)) = -40000-1081 = -41081

Total Future value of positive cash flows = (11000*(1.20^7))+ (11000*(1.20^6))+ (11000*(1.20^5))+ (11000*(1.20^4))+ (11000*(1.20^3))+ (11000*(1.20^2))+ (11000*(1.20^1)) = 39415+32846+27372+22810+19008+15840+13200 = 170491

Expected rate of return = (future value of positive cash flows / present value of negative cash flows) ^ (1/8) -1

= ((170491/41081) ^ (1/8))-1 = 0.1946

=19.5%

(If answer is required to 0 decimal places then it will be 19%)