Question

Project A costs $2,000, and its cash flows are the same in Years 1 through 10. Its IRR is 16%, and its WACC is 9%. What is the project's MIRR? Do not round off intermediate calculation. Round your answer to two decimal places. %

(PLEASE SHOW WORK)

Answer 1

IRR is the rate of return that makes costs equal to present value of cash inflows

Initial investment = Annuity * [1 - 1 / (1 + r)ⁿ] / r

2000 = Annuity * [1 - 1 / (1 + 0.16)¹⁰] / 0.16

2000 = Annuity * [1 - 0.226684] / 0.16

2000 = Annuity * 4.833227

Annuity = 413.80217

Future value = Annuity * [(1 + r)ⁿ - 1] / r

Future value = 413.80217 * [(1 + 0.09)¹⁰ - 1] / 0.09

Future value = 413.80217 * 15.19293

Future value = 6,286.86729

MIRR = (FV / initial investment)^1/n - 1

MIRR = (6,286.86729 / 2000)^1/10 - 1

MIRR = (3.143434)^1/10 - 1

MIRR = 1.1213 - 1

MIRR = 0.1213 or 12.13%