A project has the following cash flow data. What is its MIRR?
r = |
12.25% |
||||
Year |
0 |
1 |
2 |
3 |
4 |
Cash flows |
−$850 |
$300 |
$320 |
$340 |
$360 |
Project | |||||
Combination approach | |||||
All negative cash flows are discounted back to the present and all positive cash flows are compounded out to the end of the project’s life | |||||
Thus year 4 modified cash flow=(424.31)+(403.2)+(381.65)+(360) | |||||
=1569.16 | |||||
Thus year 0 modified cash flow=-850 | |||||
=-850 | |||||
Discount rate | 0.1225 | ||||
Year | 0 | 1 | 2 | 3 | 4 |
Cash flow stream | -850 | 300 | 320 | 340 | 360 |
Discount factor | 1 | 1.1225 | 1.260006 | 1.414357 | 1.5876158 |
Compound factor | 1 | 1.414357 | 1.260006 | 1.1225 | 1 |
Discounted cash flows | -850 | 0 | 0 | 0 | 0 |
Compounded cash flows | 0 | 424.31 | 403.2 | 381.65 | 360 |
Modified cash flow | -850 | 0 | 0 | 0 | 1569.16 |
Discounting factor (using MIRR) | 1 | 1.165633 | 1.358701 | 1.583747 | 1.8460687 |
Discounted cash flows | -850 | 0 | 0 | 0 | 850.00086 |
NPV = Sum of discounted cash flows | |||||
NPV= | 0.000859549 | ||||
MIRR is the rate at which NPV = 0 | |||||
MIRR= | 16.56% | ||||
Where | |||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | ||||
Discounted Cashflow= | Cash flow stream/discounting factor | ||||
Compounding factor = | (1 + reinvestment rate)^(time of last CF-Corresponding period in years) |
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