Question

DS is considering a project that has the following cash flow and WACC data. What is the project's MIRR?

WACC: 10.00%

Year | 0 | 1 | 2 | 3 |

Cash flows | -$2,000 | $800 | $800 | $1,000 |

Answer #1

IRR is the rate at which PV of Cash Inflows are equal to PV of cash outflows.

MIRR is similar to IRR. However in IRR, it is assumed that intermiediary CFs are reinvested at IRR. Where as in MIRR, Intermediary CFs are reinvested at WACC.

Year |
Bal Yrs |
CF |
FVF @10% |
FV of CFs |

1 | 2 | $ 800.00 | 1.2100 | $ 968.00 |

2 | 1 | $ 800.00 | 1.1000 | $ 880.00 |

3 | 0 | $ 1,000.00 | 1.0000 | $ 1,000.00 |

FV of CFs |
$
2,848.00 |

Thus $ 2000 has become $ 2848 after 3 Years by increasing at "r%"

FV = PV (1+r)^n

2848 = 2000 ( 1 + r )^3

( 1 + r )^3 = 2848 / 2000

= 1.424

1+r = 1.424 ^ ( 1 / 3)

= 1.1250

r = 1.1250 - 1

= 0.1250 i.e 12.50%

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