Question

You are thinking of starting a travel blog. To start the blog you need to spend $40,000 today traveling. You then think the blog will generate $18,000 per year in ads for the next 6 years starting a year from today. At the end, you will need to pay $5,000 to people who got food poisoning following your food recommendations. Your discount rate is 12% APR.

1. What is the NPV?

2. What is the IRR?

3. What is the MIRR if you use the discount rate as the reinvestment rate?

Answer 1

1.

R = 12%

Initial investment = $40000

At the end, compensation paid = $5000

NPV = present value of cash inflows – present value of the payments due to food poisoning – initial investment

NPV = 18000*(1-1/1.12^6)/.12 - 5000/1.12^6 – 40000

NPV = $31472.18 or $31472

2.

Let, IRR = R

Then,

40000 = 18000*(1-1/(1+R)^6)/R - 5000/(1+R)^6

At R = 38%

Present value of cash inflows = $39786.23

At R = 37%

Present value of cash inflows =$40534.64

So,

R = 37% + ((40534.64-40000)/(40534.64-39786.23))*(38%-37%)

R = 37.71%

3.

Net future value of the cash inflows = 18000*(1.12^6-1)/.12 - 5000 = $141073.40

So,

MIRR = (141073.40/40000)^(1/6) – 1

MIRR = 23.38%