Question

Belanger Construction is considering the following project. The project has an up-front cost and will also generate the following subsequent cash flows:

            t = 1      $400
            t = 2      500
            t = 3      200

The project’s payback is 1.5 years, and it has a cost of capital of 10 percent. What is the project’s modified internal rate of return (MIRR)?

Answer 1

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

Hence initial cost=400+(500*0.5)=$650

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

Future value of inflows=400*(1.1)^2+500*(1.1)+200

=1234

MIRR=[Future value of inflows/Present value of outflows]^(1/time period)-1

=[1234/650]^(1/3)-1

=23.82%(Approx).