A project has a cost of $150,000 and is expected to provide after-tax annual cash flows of $100,000 for two years. The firm's management is uncomfortable with the IRR reinvestment assumption and prefers the modified IRR approach. You have calculated a cost of capital for the firm of 12 percent. What is the project's MIRR?

Question

Business

Nicholas Blackwell

1 January, 04:48

A project has a cost of $150,000 and is expected to provide after-tax annual cash flows of $100,000 for two years. The firm's management is uncomfortable with the IRR reinvestment assumption and prefers the modified IRR approach. You have calculated a cost of capital for the firm of 12 percent. What is the project's MIRR?

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Philip · Answer 1

6.15%

Explanation:

cash flow 0 = - 150,000

cash flow 1 = 100,000

cash flow 2 = 100,000

r = 12%

MIRR = ⁿ√ (FVCF / PVCF) - 1

FVCF = future value of positive cash flows discounted at r. FVCF = (100,000 / 1.12) + (100,000 / 1.12²) = 89,285.71 + 79,719.39 = 169,005.1 PVCF = the present value of negative cash flows = - 150,000 n = number of periods = 2

MIRR = √ (169,005.1 / - 150,000) - 1 = √-1.1267 - 1 = 1.0615 - 1 = 0.0615 or 6.15%