Question

A project is expected to have annual cash flows of $36,800, $24,600, and –$9,200 for Years 1 to 3, respectively. The initial cash outlay is $44,500 and the discount rate is 11 percent. What is the modified IRR?

Answer 1

Solution--  

Cash flows	Duration (years)	Rate	Terminal Value
36,800	2	11%	45341.28
24,600	1	11%	27306
-9,200	0	11%	-9200
			63,447.28

Terminal Value = Cash flow * (1+rate)^n

For example = 36,800 * (1+11%)^2 = $45,341.28

Present Value of Cash Outflows = $44,500

Modified Internal Rate of Return = (Terminal Value of Cash Inflows ÷ Present Value of Cash Outflows)^(1/n) – 1

=(63,447.28 / 44,500)^1/3 - 1

= (1.43)^1/3 - 1

= 1.1255 - 1 = 0.1255 = 12.55%

Modified Internal Rate of Return = 12.55%