Question

Tall Trees, Inc. is using the modified internal rate of return (MIRR) when evaluating projects. The company is able to reinvest cash flows received from the project at an annual rate of 12.40 percent. What is the MIRR of a project if the initial costs are $1,386,400 and the project life is estimated as 9 years? The project will produce the same after-tax cash inflows of 476,200 per year at the end of the year.

Answer 1

In MIRR we assume that the future positive cash inflows are reinvested at the given rate.

Initial cash outflow = $1,386,400

Future value of cash inflows = $7156431.35 (from Below table)

We have to find at what rate the present value of cash inflow is equal to initial cash outflow

In short at what rate PV = FV ?

How to read the table?

See, at the end of year 1, the cash inflow that is $476,200 is reinvested in the project for next 8 years. And at the rate of 12.40% the value of $1 at the end of 8 years from the end of 1st year will be 2.5476. The formula is (1+i)ⁿ = (1+0.1240)⁸

Similarly, see at the end of 9th year the number of years left is 0 there for (1+0.1240)⁰ = 1

Now let us solve for MIRR.

Therefore Modified rate of return of the project is 20%.