Question

Dunder Mifflin Paper Company is considering purchasing a new stamping machine that costs ​$450,000. This new machine will produce cash inflows of $150,000 each year at the end of years 1 through​ 5, then at the end of year 7 there will be a cash outflow of $200,000 The company has a weighted average cost of capital of 14 percent​ (use this as the reinvestment​ rate). What is the MIRR of the​ investment?

Answer 1

Modified Internal rate of return (MIRR) is a modified form of IRR which assumes that cash flows are reinvestment at the weighted average cost of capital (WACC) of 14%.

The MIRR for Project where the weighted average cost of capital (WACC) = 14%

PV of cost = Initial cost + PV of cash outflow at the end of year 7

= Initial cost +cash outflow / (1+WACC) ^7

= $450,000 + $200,000/ (1+14%) ^7

= $529,927.46

Future value of cash inflows = Sum of cash inflows * (1+ WACC) ^ (7- t)

Where t is time period

Future value of cash inflows = $150,000*(1.14) ^ (7-1) + $150,000*(1.14) ^ (7-2) + $150,000*(1.14) ^ (7-3) +$150,000*(1.14) ^ (7-4) + $150,000*(1.14) ^ (7-5)

= $329,245.89 + $288,812.19 + $253,344.02 + $222,231.60 + $194,940.00

= $1,288,573.70

The MIRR is that discount rate which forces the future value of cash inflows of $1,288,573.70 in 7 years to equal $529,927.46

$529,927.46 = $1,288,573.70 / (1+MIRR) ^7

MIRR of Project = 13.53%.

MIRR of Project is 13.53% which is less than the WACC of 14%; therefore the project should not be accepted.