Question

You are the financial analyst for the Glad It’s Finally Over Company. The director of capital budgeting has asked you to analyze a proposed capital investment. The project has a cost of $30,000 and the cost of capital is 10%. The project’s expected net cash flows are as follows:

Year                Expected Net Cash Flow

                           0                               ($30,000)

                           1 12,500

                           2 10,000

                           3 10,000

                           4 8,000

What is the project’s modified internal rate of return?

Show BA II Plus Calculator Functions for Answer

Answer 1

From the given cash flows and cost of capital, MIRR is calculated as follow:

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

So, FV of positive cash flows can be calculated as follow on BA II plus calculator:

press on CF,

put CF0 = 0

C01 = 12500

F01 = 1

C02 = 10000

F02 = 1

C03 = 10000

F03 = 1

C04 = 8000

F04 = 1

press down arrow key and then press NPV. It will ask for IRR, put IRR = 10

compute for NPV, we get NPV = $32605.35

put N = 4,

I/Y = 10

PV = -32605.35

PMT = 0

and compute for FV, we get FV = 47737.50

So, FV of positive cash flows is $47737.50

PV of negative cash flow = C0 = $30000

So, Now MIRR = (47737.5/30000)^(1/4) - 1 = 12.31%

So, Project's modified internal rate of return is 12.31%