Question

For the net cash flow series, find the external rate of return (EROR) using the MIRR method with an investment rate of 25% per year and a borrowing rate of 12% per year Net Cash Flow, $ -6.000 The external rate of return is %

Answer 1

Solution :-

Investment Rate = 25% per year

Borrowing Rate = 12%

Now Positive Cashflows =

in Year 1 = $10000

in Year 4 = $5000

in Year 6 = $2300

Now Calculate Future Value of Positive Cashflows at the end of year 6 =

= $10000 * (1 + 0.25)⁵ + $5000 * (1 + 0.25)² + $2300 * (1 + 0.25)⁰

= $10000*3.052 + $5000*1.5625 + $2300

= $32817.58

Now negative Cashflows

in Year 2 = - $9000

In Year 3 = - $6000

In Year 5 = - $800

Now Calculate Present Value of all negative cashflows at borrowing Rate

= $9000 / (1 + 0.12)² + $6000 / (1 + 0.12)³ + $800 / (1 + 0.12)⁵

= $11899.37

Now n = 6 as Period is 6 years

Now MIRR = ( FVCI / PVCO )^1/n - 1

= ( $32817.58 / $11899.37 )^1/6 - 1

= ( 2.7579 )^1/6 - 1

= ( 1.1842 ) - 1 = 0.1842 = 18.42%