Question

This Test: 100 pts possible All EQuestion Help (Related to Checkpoint 11.6) (MIRR calculation) Emily's Soccer Mania is con million and would generate annual cash infows of $3. million. During years 6 through 10 the project wl provide cash infows of $4 2 million per year. Caiculate the projecr's MIRR. given a The MIRR of the project with a discount rate of 12%»D%.(Round to two decimal places) sidering building a new piant. This project would require an intial cash outlay of $8.5 8 million per year for years one through four. In year five the project will require an investment oulay of $4.2

Answer 1

Here we are required to calculate Modified Internal Rate of Return (MIRR).

The cash flows in the given case is as follows: (discounting factor i.e. cost of capital of the company = 12%)

Year    Cash Flow (negative figure represents cash outflow)

0             - 8.5 million

1-4            3.8 million

5              -4.2 million

6-10         4.2 million

KINDLY NOTE THAT IN THE FORMULA FOR CALCULATION OF MIRR, FINANCING RATE IS THE COMPANY'S COST OF CAPITAL WHILE REINVESTMENT RATE IS THE RATE AT WHICH THE POSITIVE CASH FLOWS ARE EXPECTED TO BE INVESTED. IN THE CASE GIVEN, WE HAVE ONLY THE COMPANY'S COST OF CAPITAL OF 12% BUT THE REINVESTMENT RATE NEEDS TO BE ASSUMED IN THE ABSENCE OF INFORMATION.

Therefore, assuming the reinvestment rate to be 10%, we calculate MIRR using the formula,

MIRR = nth root of (Future value of positive cash flows at 10%/-present value of cash outflow at 12%

MIRR = 10th root of 57/-11

MIRR = 17.98%