Question

11.

Project A requires an initial outlay at t = 0 of $4,000, and its cash flows are the same in Years 1 through 10. Its IRR is 15%, 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

At irr,present value of inflows=present value of outflows=4000

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

4000=Cash inflow for year 1/1.15+Cash inflow for year 2/1.15^2+.................+Cash inflow for year 10/1.15^10

4000=Annual cash inflow[1/1.15+1/1.15^2+...............+1/1.15^10]

4000=Annual cash inflow*5.01876863

Annual cash inflow=4000/5.01876863

=$797.008249(Approx)

Hence for MIRR:

Future value of annuity=Annuity[(1+rate)^time period-1]/rate

=797.008249[(1.12)^10-1]/0.12

=797.008249*17.5487351

=13986.4866

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

=[13986.4866/4000]^(1/10)-1

=13.34%(Approx).