Question

15. Project A costs $4,000, and its cash flows are the same in Years 1 through 10. Its IRR is 18%, and its WACC is 12%. What is the project's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

%

Answer 1

Given about project A,

Initial cost C0 = $4000

cash flows are the same in Years 1 through 10

IRR = 18%

WACC = 12%

term period = 10 years

So, annual cash flow of the project using annuity formula is

PMT = PV*r/(1 - (1+r)^-10) = 4000*0.18/(1 - 1.18^-10) = $890.06

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

FV of positive cash flows is calculated using WACC as financing rate, using annuity is

FV = PMT*((1+WACC)^t - 1)/WACC = 890.06*(1.12^10 - 1)/0.12 = $15619.40

PV of negative cash flows = C0 = 4000

=> MIRR = (15619.40/4000)^(1/10) - 1 = 14.59%