Question

A project will cost $67,000, its expected cash inflows are $9,900 per year for 8 years, and its WACC is 5%. What is the project’s MIRR? (Using the combination approach or the reinvestment approach will yield the same answer in this particular problem.) **Assume cash inflows are reinvested at the WACC**.

Select one:

A. 4.15%

B. 4.40%

C. 4.86%

D. 5.00%

E. 5.22%

Answer 1

Given about a project,

Initial cost Co = $67000

expected cash inflows are $9,900 per year for 8 years

WACC Kc = 5%

MIRR is calculated using following formula,

MIRR = (FV of future positive cash flows/PV of negative cash flows)^(1/t) - 1

So, here FV of future positive cash flow is calculated for all expected cash infloes for 8 years. It is calculated using FV formula of an ordinary annuity:

FV = PMT*((1+r)^t - 1)/r = 9900*(1.05^8 - 1)/0.05 = $94536.18

PV of negative cash flow = Co = $67000

t = 8 years,

So, MIRR = (94536.18/67000)^(1/8) - 1 = 4.40%

So, Option B is correct.