Question

Aviation Inc. is considering a new inventory system that will cost $375,00. The system is expected to generate $315,000 in year one, -$25,000 (negative) in year two, $110,000 in year three, and $150,000 in year four. Aviation's required rate of return is 10%. What is the MIRR (modified internal rate of return) of this project?

Answer 1

Aviation Inc. is considering a new inventory system that will cost $375,00. The system is expected to generate $315,000 in year one, -$25,000 (negative) in year two, $110,000 in year three, and $150,000 in year four. Aviation's required rate of return is 10%. What is the MIRR (modified internal rate of return) of this project?

MIRR = FV of inflows V PV of out flows

Year	CF	Discount or Compound Factor		CF
0	$    -37,500.00	1/(1+0.1)^0=	1	1*-37500=	$     -37,500.00
1	$ 3,15,000.00	(1+0.1)^1=	1.1	1.1*315000=	$   3,46,500.00
2	$    -25,000.00	1/(1+0.1)^2=	0.826446281	0.826446280991735*-25000=	$     -20,661.16
3	$      11,000.00	(1+0.1)^3=	1.331	1.331*11000=	$       14,641.00
4	$ 1,50,000.00	(1+0.1)^4=	1.4641	1.4641*150000=	$   2,19,615.00

Negative values are only an indicator of outflow, we use only the absolute values in the MIRR formula

MIRR = 346500 + 14641 + 219615 37500 + 20661

5, 80, 756.00 MIRR = 1 V 58,161.16

MIRR = 0.7776

Therefore MIRR = 77.76%