Question

DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 10%. What is the modified internal rate of return of this project?

		14.35%
		11.57%
		12.56%
		10.87%

Answer 1

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period

Future value of inflows=350,000*(1.1)^3+325000*(1.1)^2+150,000*(1.1)+180,000

=1204100

MIRR=[Future value of inflows/Present value of outflows]^(1/time period)-1

=[1204100/750,000]^(1/4)-1

=12.56%(Approx)