Down Under stores are considering an investment with an intial cost of \$236,00. In Year 4, the project will require an additional investment and finally, the project will be shut down in Year 7. The annual cash flows for Years 1 - 7 are projected as \$64,000, \$87,000 \$91,000, -\$48,000, \$122,000, \$154,000, and -\$30,000. If all negative cash flows are moved to Time 0 using a discount rate of 13%, what is the project's modified IRR?

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Down Under stores are considering an investment with an intial cost of \$236,00. In Year 4, the project will require an additional investment and finally, the project will be shut down in Year 7. The annual cash flows for Years 1 - 7 are projected as \$64,000, \$87,000 \$91,000, -\$48,000, \$122,000, \$154,000, and -\$30,000. If all negative cash flows are moved to Time 0 using a discount rate of 13%, what is the project's modified IRR?

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Step 1

For the purpose of MIRR calculation, we will have to first separate the positive and negative cash flows. Then:

• All negative cash flows will have to be shifted to the start i.e t = 0 using the present value method
• All positive cash flows will have to shifted to the terminal year i.e. t = 7 using the future value method
• We will have to then calculate the MIRR using the standard formula
Step 2

A cash flow in future can be shifted to t=0 using the present value formula as shown on the whiteboard, where r= discount rate = 13% and n = nos. of years between t=0 and t when the negative cah flow actually occurs.

Step 3

All negative cash flows have been identified and shifted to t=0 using the PV formula shown in the earlier step, in the table below:

r= discount rate = 13% = 0.13

 Period of occurrence (t) Negative Cash flow (FV) Periods between t=0 and actual occurrence (n) = (t) - 0 Discount factor 1 / (1 + r)n PV = FV x Discount factor 0 236,000.00 0 1.00000000 236,000.00 4 48,000.00 4 0.613318728 29,439.30 7 30,000.00 7 0.425060644 12,751.82 Total 314,000.00 278,191.12

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