Question

You are the CFO of a beer and wine distribution company, B&W Company, which is planning to expand into Florida. The Board has asked you to do an analysis of the expected return on a new warehouse and related equipment required for the expansion. The new warehouse would be more efficient and could handle the volume anticipated in the new territory. The project would require an initial investment of $20 million with an add-on investment of $5 million at the end of Year 2. The expected after-tax returns for the next 5 years are: $4 million, $5 million, $8 million,          $9 million, and $9 million respectively.

You assume the project’s returns are received at the end of each year and have determined the WACC is 8%.

1. What is the project’s MIRR? (Your answer should be a % carried to 2 places.)

Answer 1

Reinvestment Approach
All cash flows except the first are compounded to the last time period and IRR is calculated
Thus year 5 modified cash flow=(5.44)+(9.33)+(9.72)+(9)
=33.49
Discount rate	8.000%
Year	0	1	2	3	4	5
Cash flow stream	-20.000	4.000	0.000	8.000	9.000	9.000
Compound factor	1.000	1.360	1.260	1.166	1.080	1.000
Compounded cash flows	-20.000	5.44	0	9.33	9.72	9
Modified cash flow	-20.000	0	0	0	0	33.490
Discounting factor (using MIRR)	1.000	1.109	1.229	1.363	1.511	1.675
Discounted cash flows	-20.000	0.000	0.000	0.000	0.000	19.999
NPV = Sum of discounted cash flows
NPV Discount rate =	0.00
MIRR is the rate at which NPV = 0
MIRR=	10.86%
Where
Compounding factor =	(1 + reinvestment rate)^(time of last CF-Corresponding period in years)
compounded Cashflow=	Cash flow stream*compounding factor