Question

A project has an initial cost of $52,425, expected net cash inflows of $15,000 per year for 11 years, and a cost of capital of 12%. What is the project's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Modified Internal rate of return (MIRR) is a modified form of IRR which assumes that cash flows are reinvestment at the cost of capital.

The MIRR for Project, where cost of capital r = 12%

Present value (PV) of cost (Initial cost) = $52,425

Terminal value or future value of cash inflows = Sum of {cash inflows * (1+r)^ n}

Where n is time period

Cash inflows per period = $15,000

Therefore,

Terminal value or future value of cash inflows = $15,000*(1.12) ^11 + $15,000*(1.12) ^10 + $15,000*(1.12) ^9 +$15,000*(1.12) ^8 +$15,000*(1.12) ^7 + $15,000*(1.12) ^6 + $15,000*(1.12) ^5 +$15,000*(1.12) ^4 +$15,000*(1.12) ^3 + $15,000*(1.12) ^2 + $15,000*(1.12) ^1

= $52,178.25 +$46,587.72 +$41,596.18 +$37,139.45 +$33,160.22 +$29,607.34 +$26,435.13 +$23,602.79 +$21,073.92 +$18,816.00 +$16,800.00

= $346,997.00

The MIRR is that discount rate which forces the Terminal value or future value of cash inflows of $346,997.00 in 11 years to equal $52,425

$52,425 = $346,997.00 / (1+MIRR) ^11

MIRR of Project = ($346,997.00/$52,425) ^ (1/11) - 1 = 1.1875 – 1 = 0.1875 or 18.75%.

MIRR of Project is 18.75% which is more than the cost of capital of 12%, therefore the project should be accepted.