Question

7 Find the MIRR assuming a 4 % reinvestment rate using the following cash flows: T0 = -39,000 T1 = + 20,000 T2 = + 30,000

Answer 1

As we know the formula for MIRR(Modified Internal Rate of Return) is given by:

(Future Value of Positive Cash Flows/Present Value of Negative Cash Flows)^(1/n) -1

Here n = no of periods = 2

Here Present Value of Negative Cash Flows in -39,000

Future Value of Positive Cash Flows in found at the reinvestment rate of 4%

Here we have to reinvest the positive cash flows so the cash flow at T1 would be reinvested for one year so it will give us the value of cash flow at T2 and the cashflow received at T2 is take as it is.

So FV of T1 = 20000 * (1.04) = 20,800

Future Value of Positive Cash Flows = 20800 + 30000 = 50800

Now putting in formula the above values we get

MIRR = (50800/39000)^(1/2) -1

= 1.141299 -1

= 0.141299

= 14.13%