Question

16.  Problem 11.21 (MIRR)

Project A costs $4,000, and its cash flows are the same in Years 1 through 10. Its IRR is 16%, and its WACC is 9%. What is the project's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

IRR is the rate at which PV of Cash Inflows are equal to Project Cost. In IRR, it is assumed that intermediary cashflows are reinvested at IRR,

MIRR is similar to IRR. However it is assumed that intermediary cashflows are reinvested at WACC.

Let X be the CF each year.

Thus 4.8327X = 4000

X = 4000 / 4.8327

= 827.69

MIRR:

Thus 4000 has become 12575.04 in 10 years

12575.04 = 4000 (1+MIRR)^10

(1+MIRR)^10 = 12575.04 / 4000

= 3.1438

1+MIRR = (3.1438)(1/10)

= 1.1214

MIRR = 1.1214 - 1

= 0.1214

i.e 12.14%