Question

The purpose of the question is to evaluate a proposed project. This project has the following cash flows:

year	0	1	2	3	4	5	6
CF($M)	-1,000	250	350	400	500	600	-800

The company can reinvest cash inflows at a rate of 15%, the company's cost of capital is 12%. what is the MIRR of the project?(show the detailed steps, please do not use excel)

Answer 1

MIRR = ( FV_c / PV_fc )^1/n -1

where, FV_c is the  future value of positive cash flows at the reinvestment rate(15% or 0.15)

and PV_fc is the present value of negative cash flows at the financing cost (12% or 0.12)

CF₀ = -1000
CF₁ = 250
CF₂ = 350
CF₃ = 400
CF₄ = 500
CF₅ = 600
CF₆ = -800

PV_fc = 1000 + 800/(1+0.12)⁶ = 1405.30

FV_c = 250*1.15⁵ + 350*1.15⁴ + 400*1.15³ + 500*1.15² + 600*1.15 = 3074.59

Hence, MIRR = (3074.59/1405.30)^1/6 - 1 = 1.1394 - 1 = 0.1394 or 13.94%