Question

Vitro wants to invest in a new Project with great expectative. The initial investment is $9,000. The first year the company expect a cash inflow of $10,000 and a cash outflow of $1000. The second and the third period expect to grow it’s cash inflow 20% per year and it’s cash outflows 10% per year. Calculate the MIRR of the project. (Finance rate 10% and Reinvestment rate 15%)

Answer 1

Cash inflow in 1st year= 10,000

Cash inflow in 2nd year= 10,000 × 1.20 = 12,000

Cash inflow in 3rd year= 12,000 × 1.20 = 14,400

Cash outflow in 1st year= 1,000

Cash outflow in 2nd year= 1,000 × 1.10= 1,100

Cash outflow in 3rd year= 1,100 × 1.10= 1,210

Future value of cash inflow =10,000×(1.15)^2 + 12,000 × (1.15)^1 + 14,400

= 10,000 × 1.3225 + 12,000 × 1.15 + 14,400

= 13,225 + 13,800 + 14,400

= $ 41,425

Present value of cash outflow = 9,000 + 1,000 / 1.15 + 1,100 / (1.15)^2 + 1,210 / (1.15)^3

= 9,000 + 869.565 + 1,100 / 1.3225 + 1,210 / 1.520875

= 9,000 + 869.565 + 831.758 + 795.595

= 11,496.92

MIRR = (future value of cash inflow / present value of cash outflow) ^ 1/n - 1

  = ( 41,425 / 11,496.62 ) ^ 1/3 - 1

= ( 3.60) ^ 1/3 - 1

= 3.60 ^ 0.333 - 1

= 1.533 - 1

= 0.533 or 53.3%

MIRR = 53.3%