Your company has an opportunity to invest in a project that is expected to resul

Question

Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $12,000 the first year, $14,000 the second year, $17,000 the third year, -$8,000 the fourth year, $24,000 the fifth year, $30,000 the sixth year, $33,000 the seventh year, and -$6,000 the eighth year. The project would cost the firm $63,800. If the firm's cost of capital is 16%, what is the modified internal rate of return?

12.97%

15.37%

14.50%

12.47%

16.18%

12.97%

15.37%

14.50%

12.47%

16.18%

Explanation / Answer

MIRR = ((Sum of future value of cashflows/initial investment outlay)^(1/life of project) – 1)*100

Compounding factor = (1 + discount rate)^(Life of project – corresponding time of cashflow)

Future value of cash flow = Cash flow value * compounding factor

WACC 16.000% WACC 16.000% Year 0 1 2 3 4 5 6 7 8 Cash flow stream -63800 12000 14000 17000 -8000 24000 30000 33000 -6000 Discounting factor 1 1.16 1.3456 1.560896 1.810639 2.100342 2.436396 2.82622 3.278415 Discounted cash flows project -63800 10344.83 10404.28 10891.18 -4418.33 11426.71 12313.27 11676.37 -1830.15 Sum of discounted future cashflows = -2991.838373 =NPV Discounting factor = (1 + Required rate)^(CORRESPONDING PERIOD IN YEARS) Discounted Cashflow= Cash flow stream/discounting factor Compounding factor= 2.82622 2.436396 2.100342 1.810639 1.560896 1.3456 1.16 1 FV of cash flows= 33914.64 34109.55 35705.81 -14485.1 37461.5 40368 38280 -6000 Sum of FV of cash flows(TV)= 199354.3826 MIRR= 15.30566335

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