What is the Annual IRR for the following set of cash flows, and would you please
ID: 2761922 • Letter: W
Question
What is the Annual IRR for the following set of cash flows, and would you please show me the formula you used to arrive at the answer
375000.00 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 -2131.18 400000.00Explanation / Answer
As the project has uneven cash flows ,ie. More than one positive and negative sets of cash flows Modified IRR will be more accurate Formula to calculate MIRR is as follows: MIRR = (Future Value of Positive Cash Flows at the Cost Of Capital of the Firm / Present Value of all Negative Cash Flows at the Financing Cost of the Firm)^(1/N) – 1 Where N is the no.of cash flows=61 Also for calculation purposes we assume (As nothing is given in the question) Financing cost to be 15% (For discounting Cash outflows to their PV) & Cost of capital to be 12% (for compounding Inflows to their future Value) PV of all negative cash flows @ Financing Cost Say 15% 2131.18*((1-(1+0.15)^-60)/0.15) 14204.63 Future Value of the positive cash flows @ Cost of capital say 12% 375000*(1+0.12)^61+400000 377390712 MIRR as per the above formula = ((377390712/14205)^(1/61))-1 0.181762834 ie. 18.18%
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