Question

Find MIRR for the project with a cost of -$20,000 and subsequent cash flows of 10,000; $40,000; - $5,000; -$30,000. Use WACC of 6%. Will you proceed with this project? Why or why not?

Answer 1

Combination approach
All negative cash flows are discounted back to the present and all positive cash flows are compounded out to the end of the project’s life
Thus year 4 modified cash flow=(11910.16)+(44944)
=56854.16
Thus year 0 modified cash flow=-20000-4198.1-23762.81
=-47960.91
Discount rate	6.000%
Year	0	1	2	3	4	5
Cash flow stream	-20000.000	10000.000	40000.000	-5000.000	-30000.000	0.000
Discount factor	1.000	1.060	1.124	1.191	1.262	1.338
Compound factor	1.000	1.191	1.124	1.060	1.000	0.943
Discounted cash flows	-20000.000	0	0	-4198.1	-23762.81	0
Compounded cash flows	0.000	11910.16	44944	0	0	0
Modified cash flow	-47960.910	0	0	0	56854.160	0
Discounting factor (using MIRR)	1.000	1.043	1.089	1.136	1.185	1.237
Discounted cash flows	-47960.910	0.000	0.000	0.000	47960.910	0.000
NPV = Sum of discounted cash flows
NPV=	0.00
MIRR is the rate at which NPV = 0
MIRR=	4.34%
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Compounding factor =	(1 + reinvestment rate)^(time of last CF-Corresponding period in years)
Compounded Cashflow=	Cash flow stream*compounding factor

Donot proceeds with the project as MIRR is less than WACC