Question

There is an oil drilling project with an original cost of -20,000, subsequent profits of 10,000 (t=1); 15,000 (t=2); and the final environmental clean-up cost of -5,000 (t=3). Its WACC is 7%. Find project's MIRR and decide whether the company should accept or reject the drilling project.

Answer 1

Cash Outflows:
Year 0 = -20,000
Year 3 = -5,000
Cash Inflows:
Year 1 = 10,000
Year 2 = 15,000

WACC = 7%

Present Value of Cash Outflows = 20,000 + 5,000/1.07^3
Present Value of Cash Outflows = 24,081.49

Future Value of Cash Inflows = 10,000*1.07^2 + 15,000*1.07
Future Value of Cash Inflows = 27,499

MIRR = (Future Value of Cash Inflows / Present Value of Cash Outflows)^(1/n) - 1
MIRR = (27,499 / 24,081.49)^(1/3) - 1
MIRR = 1.1419^(1/3) - 1
MIRR = 1.0452 - 1
MIRR = 0.0452
MIRR = 4.52%

MIRR is lower than WACC. So, we should not accept this project