Question

Morty Inc. is evaluating the following project with a risk-adjusted discount rate of 10%. Calculate the 3rd version (combination approach) of the modified internal rate of return (MIRR3). (Enter percentages as decimals and round to 4 decimals)

Year Cash Flow
0 -300,000
1 200,000
2 200,000
3 -200,000
4 200,000

Answer 1

We must first determine the terminal value of all cash flows at the end of year 4 using the 10% cost of capital in order to calculate the MIRR3.

200,000 divided by (0.1 - 0.5) results in a terminal value of 4,000,000.

Using the same 10% cost of capital, we then determine the future value of each cash outflow at year's end.

PV of outflows equals -300,000.

-300,000 x (1 0.1)4 = -466,560 is the FV of outflows.

Next, we calculate the present value of all cash inflows at the end of year 4 using the 10 percent reinvestment rate:.

The FV of inflows is equal to 200,000, 200,000, 200,000, 4,000,000, or 4,600,000.

PV of inflows = 4,600,000/(1 0,1)4 = 2,844,482.06.

Finally, using the combination approach, we can calculate the MIRR3 as the discount rate that compares the present value of all outflows to the present value of all inflows:.

PV of outflows multiplied by (1 MIRR3) times four equals PV of inflows multiplied by (1 0.1) times three.

calculating MIRR3 through the following steps.

-2,849,482.06 * (1 0.1) * 3 = -466,560 * (1 MIRR3) * 4.

(1 MIRR3)^4 = 5.3178.

1 MIRR3 equals 1.6271.

MIRR3 is equal to 0 points 62.71 percent.

This means that the project's MIRR3 is 62.171%.