Question

Tall Trees, Inc. is using the modified internal rate of return (MIRR) when evaluating projects. The company is able to reinvest cash flows received from the project at an annual rate of 13.42 percent. What is the MIRR of a project if the initial costs are $1,476,100 and the project life is estimated at 9 years? The project will produce the same after-tax cash inflows of $627,700 per year at the end of the year.

Round the answer to two decimal places in percentage form.

Answer 1

Initial Cost of the project = initial cash outflow = 1476100

After tax cash inflows per year = 627700 , No of years = 9

Let CF_1,CF₂ , CF₃, CF_4,CF_5,CF_6,CF_7,CF₈ and CF₉ be after tax cash inflow at end of year 1,year 2 ,year 3,year 4,year 5,year 6 ,year 7, year 8 and year 9 respectively

Let FV = Future value at the end of 9 years of after tax cash inflows reinvested at 13.42%  

FV = CF₁(1+13.42%)⁸ + CF₂(1+13.42%)⁷ + CF₃1+13.42%)⁶ + CF₄(1+13.42%)⁵ + CF₅ (1+13.42%)⁴ + CF₆(1+13.42%)³ + CF₇(1+13.42%)² + CF₈ (1+13.42%)¹ + CF₉

FV = 627700(1+13.42%)⁸ + 627700(1+13.42%)⁷ + 627700(1+13.42%)⁶ + 627700(1+13.42%)⁵ + 627700 (1+13.42%)⁴ + 627700(1+13.42%)³ + 627700(1+13.42%)² + 627700(1+13.42%)¹ + 627700

= 1718973.86 + 1515582.67 + 1336256.98 + 1178149.34 + 1038749.20 + 915843.06 + 807479.33 + 711937.34 + 627700

= 9850671.76

PV = Present value cash outflows = Initial Cash outflow = 1476100

MIRR = 1.23479 - 1 = 0.23479 =23.479% = 23.48%

Therefore MIRR of the project is 23.48%