Question

Project A requires an initial outlay at t = 0 of $4,000, and its cash flows are the same in Years 1 through 10. Its IRR is 13%, and its WACC is 11%. What is the project's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

%

Answer 1

Sol:

Initial investment = $4,000

IRR (r) = 13%

Period (n) = 10

To determine project's MIRR

Now let the annual cash flow be X

Present value (PV) of these cash inflows at IRR must be equal to the investment.

X * [ 1 - (1 + r)^-n] / r = 4000

X * [ 1 - (1 + 13%)^-10] / 13% = 4000

X * [ 1 - (1.13)^-10] / 0.13 = 4000

X * 5.426243 = 4000

X = 4000 / 5.426243

X = 737.16

Now let MIRR be X

WACC (r) = 11%

Future value of cash inflows = X * [ (1 + r)^n - 1] / r

Future value of cash inflows = 737.16 * [ (1 + 11%)^10 - 1] / 11%

Future value of cash inflows = 737.16 * [(1.11)^10 - 1] / 0.11

Future value of cash inflows = 737.16 * 16.72 = 12,326.80

Future value of current investment after 10 years = 4000 * ( 1 + X)^10

12,326.80 = 4000 * ( 1 + X )^10

( 1 + X)^10 = 12,326.80 / 4000 = 3.0817

1 + X = 10th root ( 3.0817)

X = 1.1191

X = 11.91%

Therefore MIRR will be 11.91%