Question

Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $20,000 the first year, $22,000 the second year, $25,000 the third year, -$8,000 the fourth year, $32,000 the fifth year, $38,000 the sixth year, $41,000 the seventh year, and -$6,000 the eighth year. The project would cost the firm $90,200. If the firm's cost of capital is 15%, what is the modified internal rate of return? Question 29 options: 15.22% 12.84% 14.35% 12.35% 16.02%

Answer 1

Modified IRR is similar to IRR. However in IRR it is assumed that intermediate cashflows are reinvested at IRR and in Modified IRR, it is assumed that intermediate cashflows are reinvested at Cost of capital

MIRR Calculation:

Thus 90200 has become 280452.6 after 8 years

Thus 90200 ( 1 +MIRR)^8 = 280542.6

(1+MIRR )^8 = 280542.6 / 90200

= 3.1092

1 + MIRR = (3.1092)^(1/8)

= 1.1522

MIRR = 1.1522 - 1

= 0.1522 i.e 15.22%

OPtion A is correct.