Question
In: Finance
Project L costs $70,000, its expected cash inflows are $10,000 per year for 8 years, and...
Project L costs $70,000, its expected cash inflows are $10,000 per year for 8 years, and its WACC is 11%. What is the project's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.
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Solutions
Expert Solution
| Reinvestment Approach | |||||||||
| All cash flows except the first are compounded to the last time period and IRR is calculated | |||||||||
| Thus year 8 modified cash flow=(20761.6)+(18704.15)+(16850.58)+(15180.7)+(13676.31)+(12321)+(11100)+(10000) | |||||||||
| =118594.34 | |||||||||
| Discount rate | 11.000% | ||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
| Cash flow stream | -70000.000 | 10000.000 | 10000.000 | 10000.000 | 10000.000 | 10000.000 | 10000.000 | 10000.000 | 10000.000 |
| Compound factor | 1.000 | 2.076 | 1.870 | 1.685 | 1.518 | 1.368 | 1.232 | 1.110 | 1.000 |
| Compounded cash flows | -70000.000 | 20761.6 | 18704.15 | 16850.58 | 15180.7 | 13676.31 | 12321 | 11100 | 10000 |
| Modified cash flow | -70000.000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 118594.340 |
| Discounting factor (using MIRR) | 1.000 | 1.068 | 1.141 | 1.219 | 1.302 | 1.390 | 1.485 | 1.586 | 1.694 |
| Discounted cash flows | -70000.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 69999.999 |
| NPV = Sum of discounted cash flows | |||||||||
| NPV Discount rate = | 0.00 | ||||||||
| MIRR is the rate at which NPV = 0 | |||||||||
| MIRR= | 6.81% | ||||||||
| Where | |||||||||
| Compounding factor = | (1 + reinvestment rate)^(time of last CF-Corresponding period in years) | ||||||||
| compounded Cashflow= | Cash flow stream*compounding factor | ||||||||
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