Question

(MIRR calculation) Artie's Wrestling Stuff is considering building a new plant. This plant would require an initial cash outlay of $8 million and would generate annual free cash inflows of $3 million per year for 8 years. Calculate the project's MIRR given: a. A required rate of return of 9 percent b. A required rate of return of 11 percent c. A required rate of return of 16 percent

Answer 1

a.Future value of annuity=Annuity[(1+rate)^time period-1]/rate

=3[(1.09)^8-1]/0.09

=3*11.0284738

=$33.0854214 million

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

=[33.0854214/8]^(1/8)-1

=19.42%(Approx)

b.Future value of annuity=Annuity[(1+rate)^time period-1]/rate

=3[(1.11)^8-1]/0.11

=3*11.8594343

=$35.5783029 million

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

=[35.5783029/8]^(1/8)-1

=20.51%(Approx)

c.Future value of annuity=Annuity[(1+rate)^time period-1]/rate

=3[(1.16)^8-1]/0.16

=3*14.2400931

=$42.7202793 million

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

=[42.7202793/8]^(1/8)-1

=23.29%(Approx)