Question

A project that costs $370,000 is expected to produce $250,000 (year 1) and $185,000 (year 2). If the required rate of return is 12 percent, what is the project's (a) NPV, (b) IRR, and (c) MIRR?

Answer 1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=250000/1.12+185000/1.12^2

=$370695.15

NPV=Present value of inflows-Present value of outflows

=$370695.15-$370000

=$695.15(Approx).

2.

Let irr be x%
At irr,present value of inflows=present value of outflows.

370000=250000/1.0x+185000/1.0x^2

Hence x=irr=12.15%(Approx).

3.

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

Hence

future value of inflows=$250000*(1.12)+$185000

=$465000

Hence MIRR=[future value of inflows/present value of outflows]^)(1/time period)-1

=[465000/370000]^(1/2)-1

=12.11%(Approx).