Question

Project A requires an initial outlay at t = 0 of $2,000, and its cash flows are the same in Years 1 through 10. Its IRR is 15%, and its WACC is 8%. What is the project's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

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Answer 1

Given about project A,

Initial outlay C0 = $2000

cash flows are the same in Years 1 through 10, let it be CF

IRR = 15%

WACC = 8%

We know that at IRR, project's NPV is 0

NPV is calculated as

NPV = CF*(1 - (1+r)^-t)/r - C0

At IRR, NPV = 0 and r = 15%

So, 0 = CF*(1 - 1.15^-10)/0.15 - 2000

=> CF = 2000*0.15/0.7528

=> CF = $398.50

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

So, FV of positive cash flows = CF*((1+WACC)^t - 1)/WACC) = 398.5*(1.08^10 - 1)/0.08 = $5772.95

PV of negative cash flows = C0 = $2000

So, MIRR = (5772.95/2000)^(1/10) - 1 = 11.18%

So MIRR fo this project is 11.185