Project A cost $1,000 and Project B cost $1,000. Their expected net cash inflows are shown below....

Question:

Project A cost $1,000 and Project B cost $1,000. Their expected net cash inflows are shown below. Their WACC is 11.00%.

What is Project B's Modified Internal Rate of Return?

Project A

Year 0 -$1,000

Year 1 $675

Year 2 $650

Project B

Year 0 -$1,000

Year 1 $1,000

Year 2 $700

Year 3 $50

Year 4 $50

Modified Internal Rate of Return:

Modified internal rate of return is an improved version of the internal rate of return. internal rate of return does not consider the cash inflow that the project or asset generates during its lifetime, however, in MIRR it is assumed that the cash inflows generated by the Asset will be invested at the required rate of Return.

Answer and Explanation:

The Modified Internal rate of return is an extended version of Interenal rate of return. While calculating MIRR we assume that the cash inflow generated from the asset is reinvested that will generate additional return.

The formula to calculate MIRR is-

{eq}MIRR = \sqrt[n]{\frac{FV(Positive\ cash\ flows)}{PV (Initial\ Outlays)}}-1 {/eq}

So first we need to calculate FV of cash inflow, Pls refer below table

Year Cash Flow FV Factor @11% FV of cash flow
1 1000 1.3676 1367.6
2 700 1.2321 862.47
3 50 1.11 55.5
4 50 1 50
Total 2335.57

Now we have FV of cash inflows we can calculate MIRR using above furmula

{eq}MIRR = \sqrt[4]{\frac{2335.57}{1000}}-1 {/eq}

{eq}MIRR = \sqrt[4]{2.3356}-1 {/eq}

{eq}MIRR = 1.2362-1 {/eq}

{eq}MIRR = 0.2362 {/eq}

So the MIRR is 23.62%


Learn more about this topic:

Loading...
Modified Rate of Return: Definition & Example

from Finance 101: Principles of Finance

Chapter 9 / Lesson 6
4.8K

Related to this Question

Explore our homework questions and answers library